What types of advisors do Millionaires prefer? Learn the roles a registered investment advisor and full-service broker can play in wealth management.
What types of advisors do Millionaire investors prefer? The latest Millionaire Corner research shows that affluent investors are maintaining their long-standing preference for a full-service broker, though a small share consistently choose to work with a registered investment advisor.
Roughly one-third (34 percent) of Millionaire investors – those with $1 million to $5 million in investable assets - work with a full-service broker and 14 percent work with a discount or online broker, according to our recently published third-quarter study, Millionaire 2012, Volume 3 – Relationships with Advisors. Seven percent work with a registered investment advisor.
“There are subtle, but important differences between an advisor’s and a broker’s legal responsibility to clients,” according to True North Advisors, an independent advisor firm. “The differing levels of legal responsibility have a direct bearing on what investments are recommended for your account(s) and how your portfolio is constructed.”
Millionaires, who are more likely to work with a broker as opposed to a registered investment advisor, more commonly receive advice from their primary advisors on selecting individual stocks and bonds (56 percent) or diversifying their investment portfolio (56 percent), and less likely to be advised on creating a holistic financial plan (48 percent), planning for retirement (49 percent), implementing tax-advantaged strategies (46 percent) or establishing an estate plan (26 percent).
“Because brokers are paid by commissions on products sold, there is subtle pressure to do transactions,” according to True North Advisors, while a registered investment advisor, who is paid an advisory fee and bears a fiduciary duty, recommends investments to help clients achieve their financial objectives.
Both types of financial advisors, a broker-dealer and registered investment advisor, are regulated extensively, according to a U.S. Securities and Exchange Commission report, but they are subject to different standards under federal law. The 2011 SEC report, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, notes, “Retail investors generally are not aware of these differences or their legal implications. Many investors are also confused by the different standards of care that apply to investment advisors and broker-dealers. “
More than 11,000 investment advisors were registered with the SEC as of January 2011, and a small share – roughly 5 percent – were also registered as broker-dealers, according to the SEC report. A registered investment advisor typically charges fees based on the percentage of assets under management, though some may charge hourly or fixed rates, according to the SEC. A registered investment advisor bears a fiduciary duty, which binds him to work in his clients’ best interest. Among other things, a registered investment advisor must eliminate or fully disclose any potential conflicts of interest.
Roughly 5,100 broker-dealers were regulated by the SEC and the Financial Industry Regulatory Authority as of January 2011, according to the SEC report. Roughly 18 percent of FINRA-registered broker-dealers are also registered as investment advisors with the SEC or state securities agency. Most broker-dealers charge a commission on trades, according to the SEC. Unlike a registered investment advisor, a broker-dealer is not subject to a fiduciary duty, but is required to make “suitable” investments that are consistent with a customer’s interests.