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Will the Real Financial Adviser Please Stand Up? Thumbnail

Will the Real Financial Adviser Please Stand Up?

After speaking with several people about what we do at 80/20 Financial Services, it became pretty clear to me that most people have very little idea about the differences between various companies or people that call themselves financial advisers. To be fair, my industry has really done a terrible job of communicating the differences. Today, I'll give you a crash course, in layman's terms, on the 3 most typical types of business structures that all use the term financial adviser.

The 3 most common business structures that use the terms are Insurance Companies, Broker Dealers and Registered Investment Advisers. All three are very different in how they run their business and each will specialize in different areas.

Here's some more confusing news, just about anyone can use the title and it doesn't mean they have any specific education, background, experience, or certification which actually qualifies them to give financial advice.

1.Insurance Company

Insurance companies themselves typically don't use the term listed above to describe their business practices, however, many insurance agents do. Insurance agents are regulated by their respective state department and that's it. Many insurance agents are licensed to sell life insurance which also allows them to sell annuity products. 

An annuity is a contract between you and an insurance company in which you make a lump-sum payment or series of payments and, in return, receive regular disbursements, beginning either immediately or at some point in the future. An annuity is not an investment. It is a contract with an insurance company.

Insurance agents cannot legally give investment advice but they can sell you annuity contracts that you may not need. Typically, when you hear an agent only talk about annuities and you hear the terms safe money or the phrase you can never lose your money, rest assured you are speaking with an insurance agent only. Insurance Agents get paid by commission of the insurance products they sell you.

That's not always bad thing and annuities can be an important part of well diversified retirement or financial plan. However, in almost every intsance, an annuity should not be your entire financial plan.

2. Broker-Dealer

A Broker-Dealer (BD) is the legal term for an entity that is in the business of buying and selling securities aka stocks, mutual funds, etc.. for it's own account or on behalf of its customers account. A person that works under a broker dealer is what is legally referred to as a Registered Representative (RR) of that Broker-Dealer.

So the Broker Dealer is the entity and Registered Rep is the person representing the entity. Broker-Dealers are regulated by the Securities and Exchange Commission (SEC) and the Registered Representatives are members of Financial Industry Regulatory Authority (FINRA). 

Think of the classic Investment firm you see on every street corner in your town. The firm, most likely, operates as a Broker Dealer and the person you are dealing with is more than likely a Registered Representative of that Broker Dealer. They get paid a commission of the assets they sell you within your account. Their primary goal is revenue generation for the broker-dealer, not impartial financial advice.

They operate on what is referred to as the suitability standard. The suitability standard requires that a broker make recommendations that are suitable based on a client’s personal situation, but the standard does not require the advice to be in the client’s best interest. Read that line again.

A simple analogy. Say you went to a Ford dealership and you told the salesman everything you were looking for. He might think in his head, "This guy needs a Toyota Highlander," but all he has to offer you is a Ford Explorer. That sort of matches what you were looking for so he is under no legal obligation to tell you that you need a Toyota Highlander. He can sell you the Ford Explorer without any disclosure of what was actually in your best interest. That's the suitability standard in a nutshell.

3. Registered Investment Adviser

A Registered Investment Adviser (RIA) is the legal term for an entity that advises individuals on investments and manages their portfolios of investments. The legal term for a person that works for a RIA is Investment Adviser Representative (IAR). 80/20 Financial Services is a Registered Investment Adviser (RIA) with the state of Missouri and I am an Investment Adviser Representative (IAR) of 80/20 Financial Services.

RIA's earn their money through a management fee based off a percentage of the assets managed. For example, if we manage $1miilion dollars for you, we charge .05% to do this or $5,000 per year. You know exactly your fees and what you are paying for. We don't sell you portfolios, we create and manage portfolios for you. Many RIA's can also bill hourly as well.

Typically an RIA will specialize in a certain area. 80/20 Financial Services specializes in Retirement Planning. So if you are looking for retirement planning make sure you find a firm that specializes in that. You wouldn't go to a podiatrist if you needed a heart doctor. RIA's specialize in comprehensive financial planning based on whatever specialization they work in.

RIA's are regulated by the Securities and Exchange Commission (SEC) or their state regulatory commission depending on how much money they manage in total.

RIA's also are legally required to operate under the Fiduciary Standard. That means we are legally required to act in your best interest always.

Back to the car salesman analogy. Under a Fiduciary Standard, the salesman would have been required by law to advise you that what you described was a Toyota Highlander and unfortunately he only sells Ford products and he would need to refer you to someone or somewhere else that sells Toyota Highlanders. See the difference?

What Are Your Goals?

This may seem like an obvious question, but some people overlook this critical question and end up in an undesirable situation. For example, if you only need insurance, go see an Insurance Company/Agent.

If you want to invest and buy securities with a professional, go see a Broker Dealer/Registered Representative.

If you need Comprehensive Financial Planning in a specific area such as retirement, go see a Registered Investment Adviser/Investment Adviser Representative.

Find the person and company that sells what you need. Hope this helps. For more articles about retirement planning click here

Thanks for reading!

Brian Coleman/Retirement Planner/Investment Manager

80/20 Financial Services is an independent  Registered Investment Advisory Firm. Our focus is working with retirees, and we specialize in working with retirees who are approaching or going through the retirement transition. We are located in Ozark, MO but we have the ability to work with clients throughout the United States. Contact us today for help with your retirement needs.