Over the weekend the Wall Street Journal printed an article titled “ The Fiduciary Rule Is Dead. What’s An Investor To Do Now?“
The gist of the article details how the recently thrown-out Fiduciary Rule could have saved investors from the downfalls of conflict of interest which plague the investment advice industry now. Lisa Beilfus of the WSJ writes,
“Regulation is in flux, and different types of professionals are held to different standards when it comes to giving advice and recommending products. So, it can be hard to know exactly what you’re paying for.”
Even those of us who live and breathe finance have to stop and think when it comes to the different players in the world of professional financial advice. In being an analyst, trader, and investor for over 10 years now, I realized just recently realized that even I was incorrect when it came to some of the terminology describing the multitude of financial professionals. I hope this article will serve as a helpful guide which we can add to as the regulations in our industry grow and change. Let’s dive in and try and make sense of the landscape…
Stockbroker
A professional individual who executes buy and sell orders on behalf of clients for stocks and other securities in a listed market or over the counter, usually for a fee or commission. Stockbrokers are usually associated with a brokerage firm and handle transactions for retail and institutional customers alike. Charlie Sheen’s character in “Wall Street” immediately comes to mind for most people. The nature of this position is almost unrecognizable today as compared to the 1980s in the stockbroker heyday. Fewer and fewer guys are cold calling wealthy people pitching the latest stock tips (thankfully) and the wirehouses are fewer and fewer. Obvious conflicts of interest exist due to the way in which brokers are compensated. Though the majority of brokers are likely individuals with good intentions, the compensation structure makes it difficult to always keep the client’s best interests in mind.
Financial Planner
Financial planners provide their clients with advice that’ll best help them enhance their wealth with a more high level approach to your overall financial situation. They offer services like retirement and estate planning, insurance services, and investment planning. They are fee-based, fee only, and commission-based or a blend of these. While in general, a client’s best interests are kept in mind, those working on commission have the conflict of interest issue common to stockbrokers as well.
Investment Adviser / IAR
An investment adviser assists you with handling your investments and securities so that you’ll have a strong investment portfolio. These individuals first assess your financial situation and also determine your investment risk tolerance.
Following this, they propose an investing strategy specifically tailored to help you meet your goals. You can also give them permission to purchase investments for you. Investment advisors typically possess a lot of knowledge about market patterns, so if you’re planning on investing in stocks or mutual funds, they’ll be able to propose the most reasonable strategy in relation to your financial situation.
Registered investment advisors (RIAs) operate under a fiduciary standard. This means they must legally operate in your best interest. Additionally, these advisors are registered with the U.S. Securities and Exchange Commission (SEC). They typically earn money through one of two ways: Fees or commissions.
Fee-only advisors charge a flat rate for their services. Fee-based advisors can simultaneously charge clients fees and earn commissions (fee-only advisors earn solely from fees). Both fee-based and fee-only advisors act as fiduciaries.
Commission-based advisers, on the other hand, earn commissions from investment transactions with clients. While fee-based advisors have a fiduciary duty to their clients, commission-based advisers do not. Furthermore, all investment advisers must have a Securities 65 license.
Financier
The dictionary defines “financier” as a person concerned with the management of large sums of money on behalf of wealthy individuals, governments, or other large organizations. I will allow you to call about 10 people worldwide “financier.” Buffett, Tepper, Einhorn, Icahn, and a few others. Anyone else calling themselves this are generally thieves or posers. If you financial adviser is 29 years old, wearing gold watches and smoking cigars he isn’t a financier, he’s an idiot. You likely have the same grasp on the markets as he does. He does however, have many more Instagram selfies than you, likely flaunting “how much money he is making.”
Financial Analyst
Financial analysts evaluate investment opportunities. They work in banks, pension funds, mutual funds, securities firms, insurance companies, and other businesses. Financial analysts are also called securities analysts and investment analysts. They use technical, quantitative, and fundamental methods to evaluate securities and global markets.
Financial analysts can be divided into two categories: buy-side analysts and sell-side analysts.
- Buy-side analysts develop investment strategies for companies that have a lot of money to invest. These companies, called institutional investors, include hedge funds, insurance companies, independent money managers, and nonprofit organizations with large endowments, such as some universities.
- Sell-side analysts advise financial services sales agents who sell stocks, bonds, and other investments.
Some analysts work for the business media or other research houses, which are independent of the buy and sell-side.
While there are others, this encompasses the main jobs in the investment management industry. Each has its own area of expertise and some wear more than one hat. It is important to understand how they are compensated so you can decide if the conflict of interest is palpable.
Email me with any questions.
OC