by Charles L. Stanley CFP® ChFC AIF®

As a take off on the old adage of, Which came first the chicken or the egg? I want to ask the question, Which comes first the investor or the Advisor?

What seems to be a discussion limited to the insiders of the financial services community shouldn’t be. Within the realm of personal financial advice, there is heated discussion going on about fiduciary standards versus a suitability standard and who is a fiduciary and who is not, or a “Who wears the white hat?” and “Who wears the black hat?” kind of discussion.

Part of the issue revolves around conflicts of interest created by the form of compensation. Is it better to work with a “Fee-Only” Advisor, one who accepts no form of compensation except that paid directly by his client. That means no referral fees, commissions, kick backs or other forms of compensation.

So, yes, there is a significant difference between “Fee-Only” and “Fee-Based” Advisors, but most consumers and even many financial journalists don’t seem to realize that they are different; something that “Fee-Based” Advisors are happy about.

What difference does compensation make? Can’t an Advisor be competent and do a good job regardless of whether he is paid a commission along with its inherent conflicts of interest or a simple and direct fee? Of course.

So, what really are we talking about? I think we are really talking about the culture in which services are delivered; and that is really important to you, the consumer.

There are essentially two cultures for financial advice:

1. A culture in which the interests of the client are taken into account before the revenue stream interests of the Advisory firm; or,

2. A culture in which the advice must benefit the revenue stream of the employer first (regardless of the source), and only secondarily benefit the consumer.

The first is a fiduciary culture; the second is a sales culture. The first will be held to a fiduciary standard, the second is only subject to a suitability standard. The first is the culture of the Registered Investment Advisor, the second is the culture of the Registered Representative (aka a stock broker).

The real foggy area comes in with hybrid or “Fee-Based” firms where sometimes, with the same client, they are providing advice for a fee and other times they are acting in the role of a Registered Representative who sells investment products for a commission. When they are providing advice for a fee, they are required to act in a fiduciary capacity and are held under the law to a fiduciary standard like a CPA or an Attorney. However, when they switch hats to providing product as a Registered Representative, they are now operating as a salesman under a suitability standard and have a fiduciary duty to their employer, the Broker/Dealer by whom they are employed. And, when they switch hats, they should inform you that they have changed roles, but I bet they won’t.

If you think this is confusing for you as a consumer, let me tell you it is also confusing for a financial professional trying to keep this straight. I know, I did it for years. I am a recovering hybrid. Finally, I couldn’t take it any longer and left the Broker/Dealer world so I can always work under a clear fiduciary mandate and I can put the interests of my clients first – always.

The powerful forces of the major Wall Street firms don’t want the public to really understand this. I may get into trouble for writing this, but for years the regulators have allowed them to operate with a certain amount of deception toward the consuming public. There have been many television ads for major Wall Street firms that talk about giving advice to clients and putting your needs first, blah, blah, blah. Then, at the end of the ad, in print too small to read (and even if you could see it to read it, it goes by too fast) and is read by an announcer that speaks so fast no one can understand him; it is disclosed that they are really brokers and not Advisors.

This supposed disclosure is designed to give them cover in the event of an arbitration case.

Does this manifest the culture you want to work with? Does it sound like your interests are really going to come first with this firm?

So, how does an ordinary consumer like you sniff out what is really going on here? Well, it is really quite easy. Just ask one question and it will give you the answer. Ask your potential Advisor (or if you work with someone now, ask them this question), “Are you ALWAYS a fiduciary in your business relationship with me?” You should get a simple yes or no answer. If you get some kind of hem or haw then you know that this is not a trusted fiduciary relationship; the one in option #1 above. You have a #2 business type relationship. If you have a #2 type relationship, you might want to rethink it, or at least know you have to keep you eyes open and it is a buyer beware relationship, not one where you can be more relaxed because you know your Advisor is free from the conflicts of interest that exist in the Broker/Dealer world.

If you want to find a fiduciary Advisor, there is one organization that is made up strictly of Advisors who have embraced fully the #1 type relationship, the fiduciary relationship, where your interests come first; it is the National Association of Personal Financial Advisors, or (NAPFA). Every Registered NAPFA Financial Advisor annually signs a fiduciary oath. These Advisors have taken the conflict of interest created by commission based compensation out of the picture. They are the “Fee-Only” Advisors and, in my opinion (and I admit I am prejudice, because I am one), they are the guys with the white hats.

Now, you know that there is a difference between those who provide financial products for a commission and those who provide financial advice for a fee.

To insulate yourself from bad actors, get a free copy of Charles Stanley’s Special Report: How to insulate yourself from being Maodff’d. Bernie Madoff is the Wall Street broker who allegedly made off (get the pun) with $50 Billion of his client’s money. Don’t let that happen to you.

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