Different Types of Financial Professionals: Understanding Advisers

Financial Adviser? Advisor? Selling Agent? Broker Dealer? Help! What do these terms mean and how are they different? How can you be sure that you are getting financial advice from a reputable firm?

In this overwhelmingly complex financial environment, it can be difficult to distinguish between Broker Dealers, or Selling Agents, and Advisers. Selling Agents may sometimes create confusion, which can lead to the perception that they offer more comprehensive services and care than they actually do. To make things even more complicated, some investment professionals are dual registered, allowing them to act as a Financial Adviser in some scenarios and a Broker Dealer in another capacity. So how can you determine which investment professional is best for you?

Registered Investment Advisers

With Registered Investment Advisers (RIAs), you will see the terms “adviser” and “advisor” used interchangeably. While the SEC and other regulatory bodies typically use “adviser,” some publications like Forbes use “advisor.” The difference in spelling does not equate to a difference in skill or certification. It largely depends on the individual firm. Here at GDS Wealth Management, we most often use “adviser” to conform to SEC standards. When we refer to specific organizations that use the alternate spelling, like Forbes, we change our preferred spelling to align with the organization in question.

So, semantics and spellings aside, what does an adviser do? RIAs have quite a few benefits for clients.

As a provider of investment advice, RIAs are regulated under the Investment Advisers Act of 1940.

RIAs offer advice that is in the best interest of the client, and they are held to the “Fiduciary Standard.” Part of this fiduciary standard means they must disclose all conflicts of interest or potential conflicts of interest to their clients.

Registered Investment Advisers typically operate on a fee-only basis. This means they are compensated solely through a percentage of assets under management and do not receive commissions for recommending specific products or services. The fee amount may vary depending on the firm and the complexity of your account. You can be confident that with an RIA, you will not pay additional commission-based fees.

Selling Agents

Selling Agents, or brokers, offer a different type of service compared to RIAs. Although Selling Agents refer to themselves as “advisers,” they are regulated by the Securities and Exchange Act of 1934 as sellers of securities.

Selling Agents follow the “Suitability Standard,” meaning they make recommendations that are suitable for a client’s goals and are not required to disclose conflicts of interest.

Selling Agents usually operate on a “fee-based” basis, which means they earn commissions and may have revenue-sharing agreements. The firm collects commissions and other fees by selling products and/or securities. Since their compensation is tied to sales and they don’t have the same disclosure requirements as RIAs, brokers aren’t always required to put your best interest first.

Choosing the Right Fit for You

Since everyone has their own financial goals, it is not possible to definitively state that one type of investment professional is “better” than the other. So how can you find your perfect match?

When you begin interviewing advisers, you can ask your investment professional some of the following questions to determine what category they fit in and if they have your best interests in mind.

How well do you know me?

Do you understand my financial situation, cash flow needs, and long-term goals?

Have you identified my investment time horizon?

Have you recommended a long-term plan designed to meet my financial goals?

Do you operate under a regulatory requirement that requires you to act in my best interest?

In terms of specific investment strategies, you might consider asking your prospective advisers some, or all, of these questions.

Are you registered as an Insurance Agent, Broker Dealer, Investment Adviser, or are you dual registered?

Will mutual funds or other investment products be included in my portfolio? What fees might I have to pay as a result of including these?

What compensation do you receive, aside from what I pay you directly?

Do you receive commissions for certain mutual funds and/or products in my investment portfolio?

Do you receive commissions for selling stocks, bonds, or other securities?

The answers to these questions can help you determine which type of investment professional you are speaking with. While there is no “right answer” to these questions, the answers you receive will likely reveal a lot about the firm’s overall approach to investing and client relations. Depending on your individual needs and goals, that can help you make informed decisions about how to move forward with the firm you want to partner with.