Know Your Finances: Brokers, advisors and planners. Oh my.



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If you are not intimately acquainted with the world of
financial professionals, it can be incredibly overwhelming trying to figure out
the puzzle of who does what?  Who
charges what? Who is looking out for your best interest? Who is regulated by
what agency? Who has which licenses?

I was a broker for four years at E.F. Hutton in the early
1980s and now am an independent investment advisor who also does financial
planning so I can give you the skinny on how the puzzle fits together.

A broker may also go by other names, including: stockbroker,
registered representative, financial advisor, wealth advisor, and account
executive. Brokers are employed by broker-dealer firms (also called securities
firms), which, by the very name, describes their function: the broker and its
brokerage company buy and sell securities for clients as well as for their own
benefit (dealers.)  In the last 20
years of massive consolidation, commercial banks, investment banks and
insurance companies have all bought broker-dealer companies and thus, many
types of financial firms trade securities. We’ll see how far the Obama
Administration and Congress tear down those walls…but that’s a discussion for
an entirely different article.

Brokers are licensed and regulated by the Securities and
Exchange Commission and must have certain licenses to perform their job,
specifically, Series 6, 7 and 63. Brokers are not required to be their clients’
fiduciary. A fiduciary is someone who must always act in the best interest of
someone else.  Brokers are held to
what is called the “suitability” requirement, meaning that if two similar
securities are pretty good for a client, it is legal to choose the one that
costs the client more and pays the broker more. Also, brokers do not have to
reveal any conflicts of interest about their asset choices for client
portfolios. Brokers get paid by commissions and may also be paid security price
mark-ups and ongoing annual percentage fees from products. Very often, brokers
do not have a full understanding of their clients’ financial picture and
recommend securities that may not be in the best of their clients.

When we talk about advisors we need to distinguish between independent investment advisors and advisors who
are employed by a financial firm. Advisors who are registered as independent
investment advisors must abide by the “fiduciary” requirement and always put
the interests of their clients first. They also must hold Series 6, 7, and 63
licenses and they are regulated by the Investment Advisors Act of 1940 under
the Securities and Exchange Commission. Those advisors who hold the Chartered
Financial Analyst charter are rigorously trained in investment research and portfolio
management and are held to a very high ethical and fiduciary standard. Since
they are independent they are not compensated by the providers of any products
they choose for their clients. They typically charge clients a percentage fee
based on assets under management.

Financial planners are often employed or compensated by
broker-dealers, mutual fund companies, or insurance companies, and therefore
inherently operate under conflicts of interest for their clients and do not act
as client fiduciary. On the other hand, financial planners who are independent
investment advisors do act as their clients’ fiduciaries. Financial planners
who hold the Certified Financial Planning designation shows that they have been
trained in-depth in many areas of financial planning. But be alert to the fact
that a Certified Financial Planner may or may not have conflicts of interests.
It depends on who their employer is and how they are compensated. Financial
planners can get paid in several different ways:  directly from the companies who produce the product they
recommend to you, a flat fee for a financial plan, an hourly fee, or a
percentage of assets under management.

I hope this brief review helps clears up some of the
misunderstanding some of you may had had about the financial industry and its
many professionals. Don’t be afraid to ask your financial professional:

What is your experience?

Who is your employer?

How do you get compensated?

Are you a fiduciary?

What licenses do you hold?

The better informed you are, the more rewarding partnership
you will have with your financial professional.

• I look forward to
receiving your questions about anything related to investments, retirement
planning, or the economy. Send them to: and write
“Chadds Ford Live” in the subject line.

About Ellen Le

Ellen is the Founder and President of Ascend Investment Management. She was born in Philadelphia and has lived in the Delaware Valley for most of her life. When she is not researching investments and managing portfolios, she pursues her interests in tennis, bridge, hiking and art. Beginning her investment career in 1981 as a stockbroker at E.F. Hutton and Co., Ellen now has over 20 years of investment management experience. Prior to founding Ascend in 2006, she managed high net worth assets for many years at Bank of America, Mellon Bank, and most recently at Davidson Capital Management. At Davidson Capital Management, Ellen served as a Senior Vice President and Senior Portfolio Manager of the firm. She managed assets for more than 50 family relationships and was a core member of the firm’s Investment Committee.Ellen earned a BA in History from Brown University and a MBA in Finance & Investments from The George Washington University. She is a member in good standing of the Chartered Financial Analyst (CFA) Institute, which is a global organization dedicated to setting a high ethical standard for the investment profession. Her professional memberships include the Delaware County Estate Planning Council, Women Enhancing Business (WEB), and the Chadds Ford Business Association. She is a docent with the Delaware Art Museum and an active volunteer with the Brown University Alumni Association.

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