Advisory Service Landscape in the US
Understanding the three types of financial advisors — and why the difference matters for your money.
There are about 310,000 financial advisors in America. Financial Advisors fall into just one of three categories:
Brokers
~90% of all financial advisorsBrokers don’t have to recommend the best product for you. All they are obliged to do is follow what is known as the “suitability” standard — an extremely low bar. Brokers are not required by law to act in their clients’ best interests. Brokers and their employers would earn way less money if they could no longer stack the deck in their favor.
Registered Investment Advisors (RIAs)
~10% of all financial advisorsRIAs have a fiduciary duty — a legal obligation to act in their client’s best interest at all times. An RIA must disclose any conflicts of interest and explain upfront how they are compensated. RIAs don’t accept sales commissions. They typically charge a flat fee or a percentage of AUM.
⚠ However — the vast majority are also registered as brokers.
As many as 26,000 of 31,000 RIAs operate in this grey area. Only about 5,000 of the nation’s 310,000 advisors are pure fiduciaries — a measly 1.6%. These dually registered advisors may have good intentions, but the industry is structured so that selling products is the easiest way to make money.
Dually Registered Advisors
~8% of all financial advisorsAdvisors who are registered both as brokers and as RIAs. While many have good intentions, the dual structure creates inherent conflicts between fiduciary duties and commission incentives.
Three Tricks of the Trade to Watch For
Even when working with an independent advisor, conflicts of interest can arise through clever but legal schemes.
The Poison of Proprietary Funds
The advisory firm has two arms: an RIA that offers independent advice, and a sister company that owns proprietary mutual funds. The RIA recommends the overpriced funds of the sister company. The client pays twice — for "independent" advice and again for the high-cost funds.
An Additional Fee for Doing Nothing
You pay an advisor fee of, say, 1% of assets to manage your money. The advisor then recommends a "model portfolio" with its own additional fee — a portfolio of investments the advisor was already paid to assemble. A second fee for work already included in the first.
Consulting Fees
Some independent advisors make private deals with investment firms, enabling them to earn commissions without the client knowing. The advisor recommends a fund family; the fund company pays "consulting fees" in return. Everyone profits — except the client.
“RIAs are like rare birds. Now you know why it’s so hard to get unconflicted and transparent advice.”
*Excerpts from Tony Robbins’ book Unshakable