– Scott Reed
It sounds like a trick question and, in a way, it is. Most people don’t know the difference between an advisor and an adviser. As a matter of fact, the terms have been misused so often that many investment professionals don’t know the difference either. It seems that so many firms and professionals in our business want to be known as an adviser, but adviser spelled with an “e” normally references an investment professional that:
• Provides ongoing advice for a fee
• Takes on fiduciary status in their relationship with their clients.
The vast majority of the investment professionals in our country do not meet those standards. Most investment professionals get paid by the products they use instead of by the client. The commission paid out for varying products can be vastly different and can cause a significant conflict of interest between the broker and the client
For example, the difference between putting $100,000 in a five year CD, a front-end loaded bond fund, or a variable annuity that provided regular monthly income for five years can be thousands of dollars. The problem is that they all sound like reasonable investments. That kind of difference in payout can make even the most ethical person stop and think before deciding which investment is right for their client. Some investments such as index funds don’t typically pay any commission at all so they are usually ignored by the people in our business that are paid by the product.
You may think that I don’t like that side of the business, but that is not true. For investors that want to make their own decisions and want help finding investment vehicles that they like, it is a great way to do business. For people who want someone to take care of their investment life for them, they may prefer someone who has a legal responsibility to act in the client’s best interest and is not encumbered by the huge difference in commission rates on various products.
What is crucial is that you know what relationship you have signed up for and what that means. If you are in a commission-based business relationship, it is up to you to know what you are paying for your investments. That is not a required concern of the investment professional. And you need to know that there is no requirement for the investment professional to keep up with those investments over time. That is on you as well.
It is so confusing that the Securities and Exchange Commission has set June 30 of this year as the date that their Regulation Best Interest will go into effect limiting the use of the terms adviser or advisor to, for the most part, those that provide ongoing advice for a fee.
I believe that it is crucial to an investor’s success to work with someone they trust. But it is also crucial to work with someone that does what you need them to do. When you find someone you trust that is actually working in the business model that is right for you, then you have increased your chance of success significantly. Be careful out there.
