Knowing how your advisor is compensated helps you evaluate the objectivity of the investment recommendations you receive.
We have a legal duty to provide a Fiduciary Standard of Care. This means that we:
Employees or registered representatives of insurance or securities companies may also be called stockbrokers, investment advisors, financial advisors, wealth managers, etc. Unlike fee-only Registered Investment Advisers, these representatives are not fully independent from their investment companies. They sell commission-generating products, and these commissions are often subtracted from the investment rate of return and do not show up as a separate item. Thus, consumers are often unaware of how much they are paying.
Registered representatives are held to what is called a suitability standard. They are required to recommend investments that are suitable, or adequate for the client rather than being held to the higher Fiduciary Standard of Care which legally requires a fee-only Registered Investment Adviser to place the client's best interests first.
The suitability standard allows the registered representative to recommend investment products that may benefit themselves financially over alternatives that may be better for the client. These products would still be considered "suitable" under the lower standards.
In some cases, registered representatives may be limited to selling only the products offered by their own company. Thus, the representatives' loyalty to their clients may be divided with their loyalty to their employer.
Fee-only Registered Investment Advisers, such as our firm, are free to choose from a full universe of investment choices to create a portfolio that best suits our clients' needs. Our philosophy is to keep investment costs low to benefit our clients' long-term performance.