This is a guest post by Kenneth G. Winans, a veteran investment manager based in Novato, Calif.
Despite what you might read elsewhere about managing your own finances, it is often a good idea to get some help. It’s for roughly the same reason you hire an attorney. You don’t have the skills to handle a divorce or a property dispute.
First, though, you need to understand a little bit about the mind-bending terminology Wall Street uses to describe those who want to help you enlarge your nest egg. This basically comes down to two words: advisor and broker.
An advisor is a professional you hire to pick stocks, bonds, real estate investment trusts and other investments for you. Advisors are “fiduciaries,” which means they’re legally obliged to act in your best interest. They usually charge a flat salary or fee or receive a cut (1 percent is typical) of the assets under management. Because of the compensation structure, advisors are seen as having fewer conflicts of interest than brokers.
Broker is short for stockbroker—someone working for an investment firm whose job it is to persuade a client to buy or sell stocks, bonds, mutual funds, ETFs and other financial products. Brokers are salesmen, and they’re paid on commission: no transaction, no pay. So there’s considerable incentive for them to gin up business. And they’re not fiduciaries. The broker’s standard is “suitability.” That means the investment should be appropriate for a client, but doesn’t have to be the best or even conflict-free.
“In their ads, the brokerages sell themselves again and again as providing comprehensive financial planning,” says Scott Ilgenfritz, a Florida securities lawyer and past president of the Public Investors Arbitration Bar Association, an advocacy group that helps public investors in securities arbitrations. “They send the message: You’ll be safe with us—right up until you have the audacity to complain. Suddenly, it’s: `We’re not advisors, we’re just order takers.’”