Consider that many commission brokers are not fiduciaries. They are not required to act in your best interests. They are only required to do what is suitable for you, which is certainly a lower standard. Some investors have experienced higher fees than they were aware of, and also some hidden fees.
Many commission brokers work for a brokerage company. They primarily offer investments including stocks, bonds, mutual funds, and ETFs. Commission brokers are not technically financial advisors, although many claim to be. They used to be called stock brokers (back in the 1980s and 1990s), but no longer want to be known as this for various reasons.
The Tale of Two Advisors
So let’s compare two different advisors…
Advisor #1 tells you that they are a fiduciary and will always act in your best interests. They have access to a number of different money managers and various financial investments. Some of these might include stocks and bonds. They could also offer other options outside of the stock market. Think about the potential benefits of having investments that are not correlated to the market and that could possibly increase in value even if the stock market is down. All of their clients have a customized investment strategy that fits their true needs.
Advisor #2 tells you that they are also a fiduciary and will always try to act in your best interests. They work for a big name brokerage firm and primarily offer this one companies’ stocks, bonds, mutual funds, and ETFs. They might even offer a REIT (Real Estate Investment Trust) or a variable annuity (which still carries a risk of loss to your account). Overall, the options they offer are somewhat limited. Your investment account would likely look like many of their other clients’ in a “one size fits all” type of approach.
It’s easy to see the difference between Advisor #1 and #2.
Another example would be baseball and the different positions that people play. A pitcher and an outfielder do completely different things but are both called baseball players. Depending on the situation, one might be more beneficial to the team than the other at certain times in the game or season.
Good Questions To Ask
First and foremost, ask your financial advisor if they are a fiduciary. Ask what this means and how they specifically act in your best interests.
Next, ask how many different companies or money managers they work with and offer to their clients. If they only work with one money manager, then they work for a company and not for you. How can they be sure that only one company is right for all of their clients, and for your specific needs? They might even have incentives to put their clients in certain investments. These incentives might not serve your best interests.
Ask how many different financial options they offer outside of stocks and bonds. It might make sense to have some of your investments and financial accounts outside of the stock market. This could help to potentially diversify your portfolio and reduce risks. Some investors found out the hard way back in 2000 to 2002, and then again in 2008, that they were not as diversified as their advisor had told them when they saw their investment accounts drop by 30 to 60%.
Other Factors to Beware Of
Over the past decade, we have seen the largest bull run in the history of the stock market. If there is one thing that seems to be a constant, it’s that the market goes through cycles. There are up periods and down periods. It can be important that you are prepared for the next major market downturn before it occurs.
Some advisors will talk about how long their brokerage company has been in business. They might speak about the decades of experience and their unique process of stock picking. The fact is that nobody knows where the market is heading next. In 2008, the majority of stocks were down and many investors lost money. Some long-time brokerage firms even went out of business.
Working with a true fiduciary could mean better potential returns with less risk and lower fees. Do not be fooled. There is a reason why every year we see more financial advisors go independent and stop working for the big-name firms. They no longer want to be limited to what they can offer to their clients. They truly want to work for their clients and not for one company.
The bottom line is that the more investment options that an advisor can offer from different financial companies, the better the potential effect on your financial future. Isn’t this what being a real fiduciary is all about?
This content was brought to you by Impact PartnersVoice. Advisory services offered through ZEGA Financial LLC, which is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission and does not imply that the advisor has achieved a particular level of skill or ability. All investment strategies have the potential for profit or loss. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. This information is designed to provide general information on the subjects covered; it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Riedmiller Wealth Management does not give legal or tax advice. You are encouraged to consult your tax advisor or attorney. Insurance and annuities offered through Michael Riedmiller, NE Insurance License #17294119.DT929216-0820