Broker-Dealers: Not Black Hats

Submitted by Larry Light on Saturday, September 21, 2013 - 9:00am
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To hear some tell it, advisors are divided into saints and sinners. The saints are those who work for registered investment advisor firms; they sell no securities and get paid by fees. The sinners are broker-dealers – stockbrokers who peddle product and earn commissions.

But this white hat/black hat notion is simplistic and misguided. Being a broker-dealer customer does not mean that you must constantly buy their offered wares. Those who trade only occasionally may find using brokers a better bargain. Fee-only advisors charge either a set amount for a plan (ranging from a few hundred to a few thousand bucks), or run your money for a fixed percentage, typically 1% of your assets yearly.

Fee-only folks live under the fiduciary standard, which requires them to put a customer’s interest first. Brokers adhere to the much looser suitability standard, holding that they must reasonably believe an action is in the customer’s best interests.

But the divide between the two types of advisor is not neat. For one thing, a large and increasing number of brokers are dual registered, meaning they wear both hats. For another, a number of brokers are Certified Financial Planners, a designation that requires them to pass a rigorous battery of tests – and to act as fiduciaries.

One slam against brokers is that they push the house brands, often mutual funds that under-perform their peers. Even assuming there’s truth to that contention, and I don’t believe that it is so as a rule, not all brokers work for major firms. In fact, most don’t.

Independent B-Ds, for instance, are franchisees of companies like LPL Financial. The independents are smaller offices that emphasize a personal touch, usually with no more than 10 advisors. They outnumber the household names and are found in every small town in America. These outfits operate like contractors, assuming most of the costs of running their practices, so they do not have to toe the parent’s line on what products to offer. But the parent can get them a broad of array of investments to sell.

As with any financial arrangement you make, be sure you vet what you are getting into. But don’t automatically assume one kind of advisors wears horns.

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