Isn’t it fun and exciting to know an industry secret? To be in the know? Today I am going to share with you an industry secret that I think everyone should know. It is in your best interest to know. However, like everything else in life, there is a catch. I am trying to solve it. I’ll explain it toward the end.
Ready for the secret? Do you know the difference between investment advisor and investment broker? Most people don’t. When I tell someone I am a investment advisor they confuse me for their investment broker they know. Big difference—and that can mean that your best interest is in jeopardy.
The difference has to do with the law that governs both. In other words an investment advisor, that is what I am, has to have your best interest in mind, not mine. By law I am fiduciary! On the other hand, an investment broker, is bound to his company or boss. In other words the investment broker has to have his company’s interest in mind first, before you. Big difference, huge difference! Did you know that? Don’t believe me? Read this quote.
“Investment advisers and investment brokers, who work for broker-dealers, both tailor their investment advice to individuals and institutional clients. However, they are not governed by the same standards. Investment advisers work directly for clients and must place clients' interests ahead of their own, according to the Investment Advisers Act of 1940.”
“Brokers, however, serve the broker-dealers they work for and must only believe that recommendations are suitable for clients. This suitability standard is set by the Financial Industry Regulatory Authority (FINRA).”(You can find the entire article this quote is taken from at the end of this article)
Look, I am not saying investment brokers are crooks or thieves, but it‘s hard for them to give unbiased advice when they get paid only by selling you stuff. If they don’t get you to trade and trade often, they make less money. It is not that way with an investment advisor.
An investment advisor gets paid by managing your money, roughly about 1% of assets under management. However, because that is the case it makes working for people with little money to invest difficult. Let me explain.
If I have a client with $10,000 who wants me to work with them, know that if I take them on, I only make $100 a year. Yup, that is it! Why? Because $10,000 X 1% = $100. That is not enough to pay the bills. Even if I had 200 10k clients, that is only 2 million dollars in assets under management. That would equal $20,000 a year—still well below the average income in America.
That is why investment advisors typically work only with high net worth individuals. Think about it? The same 1% yields an income of $100,000 if I had one client with $10,000,000 assets under management.
There is hope. People like myself and others are trying to get investment advisors to take on smaller clients. It is a way to give back to the community that is under served. Therefore, if you find an investment advisor who will take on small clients, treasure them. Thank them and work well with them, by law they have to have your best interest in mind. Now you know an industry secret.
That article I mentioned is Suitability vs Fiduciary standards: What's the difference?
If you have questions don’t hesitate to ask here. Take charge of your money!
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P.S. Day 317 please pray for the 7.2 million goal for 2020