Broker Check
Broker vs Fiduciary

Broker vs Fiduciary

April 23, 2018

In 2007 I entered the financial industry and little did I know at the time, America was on the brink of a major Financial Crisis, which began in 2008.  It was an interesting time to be in the business.  It was also a rather telling time to see the way advisors and other financial professionals reacted to this situation.  From that point until now, I have worked alongside many advisors at corporate brokerage firms, as well as private wealth management firms.  I have learned various things about advisors during that time and would like to share the benefit of my experiences in hopes that it will help you to make more informed decisions when it comes to working with an advisor.

There are various types of financial professionals in the business and most of them fall in one of two categories: Brokers or Fiduciaries.  There are important differences between the two but the biggest differences may be the standards to which each advisor is held and the way each advisor is compensated.

An advisor who is a Fiduciary is legally and ethically bound to a standard of serving clients’ best interests.  Fiduciaries typically provide ongoing wealth management and/or financial planning services for a fee.  This fee may come in the form of a percentage of the assets managed or an hourly charge for service.  Some fiduciaries go on to achieve the designation of Certified Financial Planner™ (CFP®).  CFP® Professionals must adhere to standards in the areas of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence when working with clients.  CFP® Professionals often strive to provide financial plans which encompass all of the major financial aspects of the client’s life.

Brokers, on the other hand, are financial representatives who provide options that are suitable for a client’s needs.  They are usually compensated with a commission, which means they typically sell products rather than services.  Brokers are sometimes very knowledgeable about certain investments or insurance products and become comfortable mainly selling those specific products. 

Both Brokers and Fiduciaries can be effective in helping to meet the needs of their clients.  However, from my experience, when the times get tough, such as it was in 2008, I believe that the standards to which advisors are held become increasingly important.   

When it comes to standards, the terms “suitability” and “best interests” sound almost like the same thing.  So what is the difference?  Allow me to illustrate with an example.  Suppose a client has a broker who decides a variable annuity is a good product that will suit the client’s financial needs.  Is the variable annuity suitable?  Yes. Does the variable annuity serve the client’s best interest?  Maybe.  But maybe not. 

Think of it like this.  Will an expensive sports car be suitable to get a client from point A to point B?  Sure.  Does the purchase of this car serve the client’s best interests?  It might- if the preferences, finances and life situation of this client all indicate that it does.  But if not, the purchase of this type of car would probably not serve the best interest of the client.

An advisor who is a fiduciary may still make a commission on product sales, but due to the fiduciary standard, this advisor must only sell a product if it serves the client’s best interest.  Additionally, because the fiduciary is charging an ongoing fee for service, the incentive for the fiduciary is to provide continuous servicing and advice to the client-  with or without the sale of products.

Going back to the variable annuity example, let’s suppose the variable annuity turns out to be a good fit.  The broker will not make any further commissions if he/she does not sell anything new to the client.  The motive to make more money can play a strong role in providing service to clients, therefore the broker may attempt to sell other products to the client.  Alternatively, the broker may move on and focus on other money-making clients, ignoring the first client.  In times of economic recession, the compensation motive may play an even stronger role. 

It is important to note that both brokers and fiduciaries can help you meet your needs.  Trusting your advisor is the most important thing.  It is also important to make sure your needs match up with the correct type of advisor.  Are you looking for comprehensive planning and management, or investment products to fulfill a specific objective? Needless to say, the biggest investment you will make is the person you choose to be your Financial Advisor.  So ask questions, choose wisely and don’t be afraid to keep searching if you change your mind later.   

The views depicted herein are for information purposes only and are not necessarily those of Cetera Advisor Networks LLC. They should not be considered specific advice or recommendations for any individual. Examples provided are hypothetical in nature and not indicative of any specific product. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.