Should I Use a Retail Broker or an Investment Advisor?

"Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway."
- Robert T Kiyosaki, Rich Dad, Poor Dad

For decades, the retail brokerage industry has been all the consumer has known. This side of the securities industry is heavily commission-driven just like the insurance industry.

Arthur Levitt Jr., the former chairman of the Securities & Exchange Commission, states in his book, Take On The Street: Sadly, the brokerage industry still has numerous flaws. That’s not to say that all brokers are commission-hungry wolves on the prowl for naïve investors. Some are; others are just inept. Most are honest professionals. They are good people stuck in a bad system. Most people are not aware they can access the professional services of fee-only advisors to manage their money through Registered Investment Advisory Firms. Registered Investment Advisors are not immune to conflict, but are less likely to make decisions motivated by greed, as their compensation is tied to your financial success. There is a saying in the industry that “compensation determines behavior.”

Potential Disadvantages of Using a Retail Broker

You cannot watch the evening news without hearing revelations of a new Wall Street scandal involving corrupt practices, such as kick backs, accepting bribes, misleading advertising and out right theft. What you may not realize is that these scandals come almost exclusively from the commission based side of the business. Mutual Fund companies and brokerage firms have been caught by the Securities & Exchange Commission with over $3.5 billion pilfered from investors in the last four years alone! The Securities & Exchange Commission (SEC) is currently in the process of returning the $3.5 billion in fines levied, however the SEC is telling Congress that they are going to establish an office that focuses solely on this issue.

According to Ric Edelman author of The Lies About Money, “…investigators from the NASD, SEC, New York Stock Exchange, and several state attorney generals… continue to uncover mischief and wrong doing in the retail mutual fund world.”

If that is not enough to dissuade you from the retail investment world, keep in mind:
• They only sell loaded funds - A, B & C shares (not institutional funds).
• Your broker is a salesperson first and foremost.
• They may give biased recommendations.
• It is very difficult to identify the actual charges and costs.
• They make money even if you don't.
• They have little motivation to manage your money once the commission is paid.

Is There an Alternative to Using a Retail Broker?
Investment Advisor Representatives

Registered Investment Advisors and their representatives are independent advisors who charge for their investment advice or charge a management fee. Again, referencing the previously quoted Scott Burns article, of the 232,000 people who call themselves financial advisors, only 13,000 are truly independent investment advisors. A word of caution: Many of the nationally recognized retail brokerage firms have begun to operate as fee-based advisors. What does this mean to you? You often are charged exorbitant fees as they are not independent investment advisors. They may also have biased recommendations.

Avantages of an Independent Investment Advisor:

• They offer true no-load funds.
• They have a greater variety of fund options.
• They function as fiduciaries regarding your account. • They offer unbiased investment advice.
• You know exactly what you are being charged.
• They are able to buy funds at a lower cost (Institutional Shares).

They can purchase Exchange Traded Funds (ETFs) which are generally cheaper than index mutual funds. Exchange traded funds can be more tax efficient when it comes to capital gains distributions. ETFs can be sold at “real time” versus mutual funds which are sold at closing day value.

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