If your Last Financial Expert let you Down, who will you call next - an Investment Advisor or a Broker?
Maybe you haven't really tapped into it yet, but investment reporters have long argued over a position on who we are to go to for advice in financial matters: is it an investment advisor or an investment broker that's better? But that debate that we always tried to sit out, needs active consideration now. The "professionals" we trusted with our money the last three or four years certainly let us down in the meltdown of 2008. We couldn't just nonchalantly go back and trust just anyone without thinking again now could we? And it isn't just the investors thinking through this either: the advisors and brokers wonder now which profession is the best belong to right now.
So, to dip your toe into the waters of the big investment advisor or broker debate, what exactly is the difference between these two? It's really something regular people rarely are aware of or understand if they are told. Investment brokers are required to keep to a certain Financial Industry Regulatory Authority code of conduct. It's called the Suitability Rule, and it requires that when the broker invests your money for you, he believes in good faith, that his advice is the best he knows of. Investment advisers on the other hand, have to answer to an even more specific and higher moral ethic. They have an ethical contract to put their clients interests before their own in a deal.
The brokers work for a firm; the firm needs each employee to bring in a proper line of commissions all the time. If investing in a cheaper product is in your best interests, they are not really required to tell you that. They just tell you whatever will earn them the best commissions. Investment advisors on the other hand, will never let you hear enough about how they don't work for anybody but you. And if they let you down anyway, you can always sue them. You couldn't ever sue a broker. Brokers argue, that the investment advisor doesn't really have the backing and the resources of a huge firm to give you the best advise possible. And that if a broker wants to be this honest and do something with your money, you have the entire brokerage firm to hold responsible. If you hold an investment adviser responsible, he doesn't have any assets.
In fact, people are so mixed up over this, that Congress is debating a new law to set this to rest once and for all. The new law will require brokers to sign an undertaking too that they will act in your best interests, and not in those of the firm. To make matters worse, some brokers moonlight as investment advisor on the side, and vice versa. So if you got to choose, what would you do? Would you choose the fast dealer, the broker who had access to all the computers, the books, the leads, of the large brokerage firm, or would you go with the honesty of an investment advisor who might operate on a more modest scale, but who operates for no higher authority than you?
But then ultimately, everything depends on self-interest. Even if an investment advisor is not paid a commission by the deal, he is paid overall on general performance. A person on a salary, is always hooked to doing what he needs to, to keep his job. If he can flatter a client going a certain way, he's going to have to do that. All of which seems to disgust people so much, they just decide to do a little reading up themselves and take care of their own business.