Prospect: Tell me Mr. Advisor, what makes you qualified to give planning advice and manage my money? Also, are you fee-only?
Advisor: Well, for one thing I am completely independent and I am fee-based. I don’t work for any of those evil brokerage firms you see advertised on TV.
Prospect: Wow, let’s get started then!
So this little parody is a bit over the top, but it is demonstrative of the sales pitch used by most registered representatives today. Everybody is using the term independent (and also Fee-based) to try to make them appear to be better than someone else. Now, I fully endorse trying to separate yourself from the pack, I do it myself, however when I state my credentials they are actually true. When most registered reps (term used to describe advisors regulated by the National Association of Securities Dealers) tell you they are independent they fail to define what independence means for them. The only true independent advisors are the ones who are Registered Investment Advisors and are fee-only (meaning their compensation comes from their clients directly). All others are basically charlatans if they represent themselves as Independent.
Why? As a registered representative you must affiliate yourself with what is called a Broker/Dealer (hereinafter referred to as a B/D). A B/D is basically an entity that provides oversight of other brokers, the technical definition is “any individual or firm in the business of buying or selling securities for itself and others.” There are many types of B/D’s, but in the most basic sense you have the big brokerage firms (Merrill, Morgan, Smith Barney) and the “Independents”. They are referred to as independents because typically the registered rep is not an employee of the B/D (as they are at the big firms), they are separate businesses.
Despite the fact that they are separate businesses the registered reps affiliated with B/D’s have similar restrictions as to what they can sell to you as the reps at the big brokerage firms. The main difference is that reps at “independent” B/D’s get to take home a bigger chunk of the commissions they earn. In fact, that is the main difference (as it applies to the consumer). An rep at an “independent” B/D has the same restrictions on what can be sold, the same conflicts of interests, and the same regulatory structure as the big brokerage firms. Actually, the regulatory oversight is usually less at an indepedent B/D, thus you have more risk of being sold a bad product. Iindependent B/D’s got slapped just as hard as the big brokerage firms in the “shelf space” scandal in which it was learned that big mutual fund and annuity companies paid the B/D’s money so that their products would receive preferred selling status.
What you should know about reps who claim to be independent is that this basically refers to how they receive their commissions. They are independent because they are not an employee, though they are regulated much of the time as if they were. The main reason reps go independent is because they get to keep more of their commissions (I’m all for that). However, being independent does NOT mean they are unbiased, does NOT mean they will act as a Fiduciary, and does Not mean they are fee-only. I have seen more people hurt by the so called “independent” planner than I care to talk about. In the end most independents are about product sales.
You must ask yourself, do you want an Independent, or someone who will put your interests first? Actually you can have both. As a Registered Investment Advisor with no outside affiliations to pull my strings I can give unbiased, independent advice that is free of product sales and commissions. Make sure you know who you are dealing with and always ask as many questions as possible, especially if someone is claiming the term “Independent” as a credential.
Scott Dauenhauer, CFP, MSFP