Broker vs. Fiduciary Advisor: Is Your Advice Conflict Free?

As I write this, a much hotly debated regulation proposed by the Department of Labor and dubbed “The Fiduciary” rule has been effectively delayed by the Trump administration and will likely be scrapped or greatly modified when it finally becomes law.

The rule automatically elevates all financial professionals who work with retirement plans to the level of fiduciary, bound legally and ethically to meet the standards of the status.The effect of this rule have reached beyond retirement plans and are reshaping all advisory and investment relationships.

Regardless of how your advisor or the financial industry feels about this rule (most don’t like it), it’s important to understand the relationship you have with your advisor and financial firm.

Generally, how your advisor gets paid influences the quality of advice you receive and can help determine if a conflict of interest may be interfering with the objectiveness of that same advice.

There are 3 kinds of arrangements that you should be aware of.

1. Brokers or Insurance Agents

They are compensated through commissions on the products they sell. For stockbrokers, they usually provide execution and recommend stocks or investment products that are available at their firms, a conflict may arise if those products are packaged by the firm or underwritten in house.

Insurance agents can also be captive agents which means they can only sell products offered by their employers. There’s the highest instances of conflicts of interest with this kind of arrangement since the broker is only held to a standard of suitability. It only requires the broker to make recommendations that are suitable based on the client’s personal situation but doesn’t require the advice to in the client’s best interest. Furthermore, there’s often a pressure to favor one or more products based on the compensation received as opposed to what’s best for the client.

2. Registered Investment Advisors (RIA)

Their compensation is often a % of the assets under management and represent the highest level of care since they are held to the fiduciary standard just like doctors and lawyers. These advisors usually have high trust and confidence because they are legally required to put their clients’ best interest before their own. This arrangement often keeps conflicts of interests at a minimum because the advisor has the highest level of disclosure regarding compensation.

3. Fee Only Independent Financial Planners

Some hold certifications such as CFP or CFA or ChFA which require study, exams and continuing education. They also adhere to a standard of ethics and don’t sell any products. They only get paid on the plans they design or charge an hourly rate. These advisors have the least instances of conflict but are also not responsible for the implementation and ongoing monitoring of their recommendations.

Some clients may prefer an arrangement over another depending of what their goals may be, however it is extremely important to understand the difference between each of these relationship dynamics and what questions to ask when engaging your advisor.

At Gerber Kawasaki, we adhere to the highest standard of care and are an independent fiduciary registered investment advisor because we believe that our clients’ best interest should always come first.

By Hatem Dhiab
Managing Partner

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.

Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393.