Is Your “Financial Advisor” Really Your Financial Advisor? (Or: Obfuscation by Title)

Welcome to another edition of From the Q, written by industry insider Q. Our man Q has worked in the financial services industry for over 30 years, and holds nothing back. His identity remains a secret.

In the old days, say 1965, if you were well heeled and sufficiently inclined you might have what would be known as a stock broker. (If you were truly wealthy, say Rockefeller rich, you would likely have a private banker.) Your stock broker would go by the slightly awkward title of Customer’s Man or maybe Registered Representative. Nobody referred to brokers as advisors. Brokers then, as now, were commissioned sales people, and back then nobody made any apologies for that fact. Under this brokerage model, investors paid for advice and guidance indirectly by paying commissions when they made transactions.

The delivery of advice and guidance with a transaction based compensation model has some serious flaws, not the least of which being that it provides the broker with an incentive to make transactions. (The industry actually has a term for excessive activity: churn.) There are a number of other conflicts in this business model and the net affect is to frequently place the broker at odds with the client’s best interest. A good broker–and there are many of them–will overcome this conflict, recognizing that their long term best interest is their clients’ wealth and well being.

The development of the fee-only advice model has successfully forced the traditional Wall Street brokers to change their practices, but nowhere is this more evident than in the nomenclature used to describe the Customer’s Man. Over the course of the last 40 years the broker has gone by a number of different monikers, and each of those titles was designed to obfuscate the fact that the broker was a commissioned salesperson.

An Offense by Any Other Name

Customer’s Man, Registered Representative, Associate, Account Executive, Financial Consultant, Investment Consultant, Advisor, and even fancy corporate titles like Vice President are some of the titles used by the brokerage industry over the last 50 years. The title in vogue today is Advisor. Yes, an advisor may have a fancy corporate title as well, but virtually all stock brokers will tell you they are advisors or financial advisors.

This is a bit of a problem for the fee-only financial advisor industry which made an effort to distance themselves from the brokerage industry. They like to be called advisors. And they actually provide advice, and in fact, most fee-only advisors manage client accounts on a fully discretionary basis which means they simply manage client portfolios by making changes in holdings as needed.

What surprises me is how well the brokerage industry tactic has succeeded. Investors use the phrase advisor to describe their personal provider, but frequently do not know if they pay via an asset based fee or via commissions. To be more precise, fee-only clients generally know how their advisor is compensated; the transaction clients generally do not know. They’ve been taken in by the use of the title ruse.

Even financial service professionals often do not understand the distinction between advisors and brokers. Within the industry they are all generally referred to generically as advisors even though these distinctions are critical within the industry. It is no wonder clients are confused.

40 Years Later, Still Dropping the Ball

The fee-only industry lobbied for a clear set of designations that would have preserved the term advisor for fee-based providers. That effort was unsuccessful, as FINRA states on their website: “FINRA does not approve or endorse any professional designation.”

There are reasons many clients prefer the commission model. And a good broker or advisor absolutely deserves to be paid for their services. The point here isn’t that advice and guidance isn’t worth compensation whatever the delivery mechanism. The issue is that Wall Street has decided to obfuscate their compensation model and blur the distinction between their commissioned sales force and fee-only advisors. You can draw your own conclusions as to why.

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