Most Registered Investment Advisors (RIAs) have a low regard for stockbrokers. RIAs understand Nobel-Prize-Winning Modern Portfolio Theory, which demonstrates higher returns can come from portfolios with lower risk, which is the "Holy Grail" of investing,. This happens when you invest a portfolio in different asset classes appropriately. By comparison, a stockbroker has a "hot stock" for you.
Importantly, RIAs have a fiduciary responsibility to do the right thing for their clients. That doesn't mean they cannot make mistakes, but they must do whatever is in the clients best interest, not their best interest. Stockbrokers only have a duty to do whatever is "suitable" or "good enough" for their client. It is a small nuance in words but a big difference in trust. For example, some mutual funds are notorious for sending stockbrokers and spouses to exotic resorts for putting clients into those mutual funds. How's that for a conflict-of-interest? Can you trust the mutual fund he sold you? What about the better mutual funds that don't send their salesmen to Hawaii?
Investors are wising up and leaving stockbrokers. Responding to this loss, brokerage houses have allowed some stockbrokers to become RIAs . . sort of . . . call them "RIA-Lite." Traditional RIAs are now called "Fee-only RIAs". They have no hidden fees. All fees are fully disclosed. Stockbrokers have multiple hidden revenue sources. Besides earning commissions on each trade, they add to the price of bonds they sell to customers, called a "mark-up." In addition, they get kickbacks every year from hidden "12b-1" fees paid by the higher-cost mutual funds they sell to customers. And, you'd be shocked by the commissions they are paid for selling you annuities. The shame of it all is that you don't even get to deduct those fees on your taxes . . . because you don't even know about them.
So, I marvel anybody would ever do business with a stockbroker instead of a Fee-only RIA. Wait a minute! There is somebody outside my window, and I hear him saying "Hey buddy, wanna a hot stock?" Yeah, I think I'll do business with someone who doesn't use Modern Portfolio Theory, does not hold a CERTIFIED FINANCIAL PLANNER certificate, charges me hidden fees, and takes his wife to Hawaii each year. What a deal! I think I can trust him . . .
Importantly, RIAs have a fiduciary responsibility to do the right thing for their clients. That doesn't mean they cannot make mistakes, but they must do whatever is in the clients best interest, not their best interest. Stockbrokers only have a duty to do whatever is "suitable" or "good enough" for their client. It is a small nuance in words but a big difference in trust. For example, some mutual funds are notorious for sending stockbrokers and spouses to exotic resorts for putting clients into those mutual funds. How's that for a conflict-of-interest? Can you trust the mutual fund he sold you? What about the better mutual funds that don't send their salesmen to Hawaii?
Investors are wising up and leaving stockbrokers. Responding to this loss, brokerage houses have allowed some stockbrokers to become RIAs . . sort of . . . call them "RIA-Lite." Traditional RIAs are now called "Fee-only RIAs". They have no hidden fees. All fees are fully disclosed. Stockbrokers have multiple hidden revenue sources. Besides earning commissions on each trade, they add to the price of bonds they sell to customers, called a "mark-up." In addition, they get kickbacks every year from hidden "12b-1" fees paid by the higher-cost mutual funds they sell to customers. And, you'd be shocked by the commissions they are paid for selling you annuities. The shame of it all is that you don't even get to deduct those fees on your taxes . . . because you don't even know about them.
So, I marvel anybody would ever do business with a stockbroker instead of a Fee-only RIA. Wait a minute! There is somebody outside my window, and I hear him saying "Hey buddy, wanna a hot stock?" Yeah, I think I'll do business with someone who doesn't use Modern Portfolio Theory, does not hold a CERTIFIED FINANCIAL PLANNER certificate, charges me hidden fees, and takes his wife to Hawaii each year. What a deal! I think I can trust him . . .
