If you are not intimately acquainted with the world of financial professionals, it can be incredibly overwhelming trying to figure out the puzzle of who does what?  Who charges what? Who is looking out for your best interest? Who is regulated by what agency? Who has which licenses?

I was a broker for four years at E.F. Hutton in the early 1980s and now am an independent investment advisor who also does financial planning so I can give you the skinny on how the puzzle fits together.

A broker may also go by other names, including: stockbroker, registered representative, financial advisor, wealth advisor, and account executive. Brokers are employed by broker-dealer firms (also called securities firms), which, by the very name, describes their function: the broker and its brokerage company buy and sell securities for clients as well as for their own benefit (dealers.)  In the last 20 years of massive consolidation, commercial banks, investment banks and insurance companies have all bought broker-dealer companies and thus, many types of financial firms trade securities. We’ll see how far the Obama Administration and Congress tear down those walls…but that’s a discussion for an entirely different article.

Brokers are licensed and regulated by the Securities and Exchange Commission and must have certain licenses to perform their job, specifically, Series 6, 7 and 63. Brokers are not required to be their clients’ fiduciary. A fiduciary is someone who must always act in the best interest of someone else.  Brokers are held to what is called the “suitability” requirement, meaning that if two similar securities are pretty good for a client, it is legal to choose the one that costs the client more and pays the broker more. Also, brokers do not have to reveal any conflicts of interest about their asset choices for client portfolios. Brokers get paid by commissions and may also be paid security price mark-ups and ongoing annual percentage fees from products. Very often, brokers do not have a full understanding of their clients’ financial picture and recommend securities that may not be in the best of their clients.

When we talk about advisors we need to distinguish between independent investment advisors and advisors who are employed by a financial firm. Advisors who are registered as independent investment advisors must abide by the “fiduciary” requirement and always put the interests of their clients first. They also must hold Series 6, 7, and 63 licenses and they are regulated by the Investment Advisors Act of 1940 under the Securities and Exchange Commission. Those advisors who hold the Chartered Financial Analyst charter are rigorously trained in investment research and portfolio management and are held to a very high ethical and fiduciary standard. Since they are independent they are not compensated by the providers of any products they choose for their clients. They typically charge clients a percentage fee based on assets under management.

Financial planners are often employed or compensated by broker-dealers, mutual fund companies, or insurance companies, and therefore inherently operate under conflicts of interest for their clients and do not act as client fiduciary. On the other hand, financial planners who are independent investment advisors do act as their clients’ fiduciaries. Financial planners who hold the Certified Financial Planning designation shows that they have been trained in-depth in many areas of financial planning. But be alert to the fact that a Certified Financial Planner may or may not have conflicts of interests. It depends on who their employer is and how they are compensated. Financial planners can get paid in several different ways:  directly from the companies who produce the product they recommend to you, a flat fee for a financial plan, an hourly fee, or a percentage of assets under management.

I hope this brief review helps clears up some of the misunderstanding some of you may had had about the financial industry and its many professionals. Don’t be afraid to ask your financial professional:

What is your experience?

Who is your employer?

How do you get compensated?

Are you a fiduciary?

What licenses do you hold?

The better informed you are, the more rewarding partnership you will have with your financial professional.

• I look forward to receiving your questions about anything related to investments, retirement planning, or the economy. Send them to: ellen@ascendinvmgt.com and write “Chadds Ford Live” in the subject line.