DDS or DMD? No Difference. Financial Planner or RIA? Huge Difference.
Your patients don’t care whether you have a DDS or a DMD. They’re the same degree with the same educational standards. Different universities simply decide which degree to award. That’s not the case when it comes to the various titles used by investment company representatives, specifically Financial Advisor and Registered Investment Advisor. You should take a moment to understand the differences between the titles.
Financial advisor can mean one of two main varieties.
The first and most common variety of financial advisor works for broker-dealers like Merrill Lynch or the investment firms affiliated with banks and insurance companies. These brokers are usually compensated by commissions generated by the products they sell to their clients. Brokers are held to a suitability standard. That means they are required to only recommend products that are suitable for their clients.
The other type of financial advisor is a Registered Investment Advisor (RIA). RIAs are required to serve in a fiduciary capacity for their clients. In other words, RIAs must focus on recommendations that are in the client’s best interests. RIAs do not receive commissions; instead they are compensated directly by their clients, usually in the form of a fee based on assets under management.
The keywords are “suitable” and “fiduciary.” Here’s a simple way to think about the difference. Let’s say you’re choosing investment options for your office’s 401(k) plan. A broker is likely to offer a selection of mutual funds that pay an upfront commission plus annual trail commissions. In order to pay those commissions, the fund has to boost its expenses — thereby reducing the return you get on your investment. Nonetheless, these funds are considered suitable investments, and the broker is under no obligation to inform you that there are less expensive and better performing alternatives. An RIA, on the other hand, would have a fiduciary obligation to recommend the lowest-cost, best-performing fund — because that’s what is best for the client. Doing otherwise would be grounds for the RIA to lose his or her license.
Most investors don’t understand this nor do they know which standard their financial advisor adheres to. As year-end approaches, now would be a good time to ask your advisor whether he is managing your retirement plan and other investment accounts as a fiduciary who is always on your side.
If you’re ready to make the most of your retirement plan, schedule a consultation today!