Types of Advisors:

  • Registered Representative (RR): these advisors are not truly advisors they are sales people who make commissions off of client transactions. Their goal is to generate revenue from transactions and their duty is owed to their firm not you, the client. They do not have to disclose conflicts of interest.
  • Investment Advisor Representative (IAR): these advisors work in a fiduciary capacity for their client. They receive compensation that is transparent to the client and is often expressed as a flat fee, hourly fee, or a percentage of assets under management (generally between 1-2%). They must disclose any material conflicts of interest.

The tricky part about the types of advisors is that one can be dually registered, meaning they are both a RR and an IAR. Those that are dually registered can wear either hat which can be very confusing to the average investor. If you work with a dually registered advisor you need to know which hat they are wearing when working with you. You will not know unless you ask.

Roles of an Advisor and Their Goals:

  1. Asset gatherer/client servicer: Their goal is to sign up as many clients as possible. Build their book of business and outsource all investment related activities. Receive income by being the middle man between the investor and the mutual fund or separate managed account. These advisors do very little to add value to clients investments and in fact reduce the clients overall returns. They often have hundreds of “clients” which minimizes how much time they spend on you.
  2. Asset Manager: Their goal is to build client portfolios that manage risk, minimize taxes, and provide income coupled with capital appreciation. They receive compensation that is based off a percentage of the assets they manage. There is never a scapegoat for poor performance other than the decision maker. These advisors strive to build a portfolio that is in line with the clients risk tolerance, goals, and needs. They do not have time to aggressively grow their client base into the hundreds as they focus their time on working for their clients.

This is very important to understand as it determines how much time they can spend on helping you plan on your financial future. Either of the two roles can provide financial planning services to a client in addition to investment related activities.