TraderSteve I retired as an Investment Advisor, and was the owner of a Registered Investment Adviser firm for a number of years. I wrote a short paper on the difference between a brokerage and an RIA firm as both an educational document and marketing piece.
I was also a state representative for the Asset Protection Society for several years. You can visit their website at www.assetprotectionsociety.org for more information, including a very good educational section.
There are some very good people working at retail brokerage firms, but you need to know where their legal allegiance lies. Above all, do your own due diligence. Steve
What You Need to Know About Financial Advice
“There is no such thing as a bad investment; only bad advice.” Unknown
A key element of evaluating financial advice is understanding the intentions of the person giving you the advice. Just who do they work for?
Arthur Levitt, former Chairman of the Securities and Exchange Commission (SEC) and his good friend Warren Buffet give us some insight on this critical issue in Levitt’s book “Take on the Street”.
In the book, Levitt recants scores of misdeeds he witnessed during his long career in the securities industry. He also makes a passionate statement early in the book;
“If you have more than $50,000 to invest, you should fire your broker and find an investment adviser. Brokerage firms would like you to think that they perform the same functions as investment advisers. Many brokers call themselves “financial consultants” or “financial advisers.” But they’re not the same as independent investment advisers.”
This statement would be difficult to understand if you didn’t know the difference between a broker and an investment advisor.
The brokerage industry falls under the Securities Exchange Act of 1934 which regulates securities exchanges and broker-dealers in order to maintain a fair and orderly market for the investing public. Their role is to ensure that all securities transactions are done in accordance with the Act.
Wanting specific protection for the public investor, Congress enacted the Investment Advisors Act of 1940, which established the rules, regulations, and registration process for the Registered Investment Advisor; and their advisors.
It assigned the responsibility for public and institutional investment advice to the investment advisor, which included a fiduciary obligation to the client. Brokers were allowed to give investment advice only as an incidental activity, and were therefore not required to take on the fiduciary obligation.
Levitt also included a quote from his friend Warren Buffet; …”Buffet says he learned that “the broker is not your friend. He’s more like a doctor who charges patients on how often they change medicines. And he gets paid far more for the stuff the house is promoting than the stuff that will make you better”.”
Levitt also stated, “Brokers may seem like clever financial experts, but they are first and foremost salespeople.” The television marketing efforts we see every day from the brokerage industry tries to tell us otherwise.
In 2005, the SEC, in another attempt to alert investors that broker-dealers do not have the same obligations as a Registered Investment Advisor, required that all broker-dealer client statements and advertising for fee-based accounts include the following:
“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest.
We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits and our salespersons’ compensation may vary by product and over time.”
You might want to carefully read this again.
TD Ameritrade Institutional amplified Levitt’s and Buffet’s statements in 2006 when they initiated an investor survey, completed by Penn, Schoen, and Berland, to determine if the alert had made a difference.
Their findings showed that, even with the notice, only 26% of investors understood that only the investment advisor, not their broker, had a fiduciary obligation to the client.
During the survey, the participants were also read the above disclosure for fee based accounts; after which “79% said they were less likely to go to a brokerage firm for financial advice.”
Your broker is not required to volunteer an explanation – you have to ask.
According to Levitt, the independent Registered Investment Advisor offers the best source for unbiased advice available to the investor. They have no obligation to anyone other than the client.
What does this mean to you? A broker has a legal obligation to their firm; an independent Registered Investment Advisor has a legal obligation to you. There is no such thing as a perfect investment.
Every investment involves a compromise of some sort.
From your perspective, a good advisor will identify those compromises and offer choices that fit your goals and objectives in a responsible, ethical, and objective manner; looking out for your best interests – always.
We’ve only discussed an advisor’s role in helping you make good investment choices. An investment advisors duties and skills go far beyond investing, and include financial planning, estate planning, wealth management, tax mitigation, etc. Our firm is accomplished in all these areas and is known for our advanced planning strategies.
Now that you know which advisor actually works solely in your best interest, visit with us and find out what an unbiased advisor can do for you. For one, you can get a complimentary report on the efficiency of your portfolio.
Socrates said something akin to; knowledge is a product of education and experience – wisdom is knowing how and when to apply knowledge. Knowledge can be reasonably determined through certifications and testing; wisdom can’t be measured – it can only surface.
Sir Joseph I think the mechanics of wealth retention and growth, albeit important, tend to be small by comparison to the mental side of sudden changes in a persons financial condition, ie:
1. "A fool and his money are soon parted". - Look at the net worth of loto winners and professional sports giants 5 years after the golden goose drops its egg. The golden egg often becomes a goose egg.
2. "The Fear of loss is emotionally twice as taxing as the joy of success". ... And the golden egg is where? ... Unfortunately the egg can become our owner if we allow the fear of going back to the hand to mouth days of financial scarcity over recognition that all earthly wealth vanishes with the lack of a beating heart.
Somewhere between foolish squandering or hording of wealth lies a vast landscape of happy, healthy, and giving activites resulting in the enjoyment of an abundant life. May we all navigate that landscape with full appreciation of the beauty around us. Sir Joseph
WRJCJ1, No one has mentioned this, so I figured I'de throw it in. It is certainly part of the post RV actions. We have discussed on this forum in the past how the profits from the RV would be taxed by the IRS. Well, I don't recall anyone pinning that down for sure so here it is.
Proof Document, ( IRS Publication 525 for the tax year 2014 ). On page 31 of that publication under title heading " Foreign Currency Transactions ", I quote " If you have a gain on a personal foreign currency transaction because of changes in exchange rate, you do not have to include that gain in your income unless it is more than $200.
If the gain is more than $200, report it as a capital gain." So, that is the tax law as of tax year 2014. What, if anything, the IRS changes that to for any year after tax year 2014 remains to be seen. Just thought I would pass that on in case anyone was still wondering about it. Smiles and Sunshine, Wayne
Maynard57 If you look at the regs with the IRS, I highly doubt many people here will qualify for capital gains treatment on exchange. Although I am an attorney, tax law is NOT my field, but having reviewed the legislation and regs, I will say that I am planning for the worst - ordinary gains treatment.
As I said before, you all might want to consider AT LEAST consulting professionals who are bonded or have malpractice insurance so they are in a position to be responsible for the consequences of whatever it is they advise you to do. This is not the time for an internet quickie.
FWIW, I know my own limitations. I have already lawyered up and picked my financial guy, who was referred by a really good business firm. I am also considering paying a hefty sum for a very thorough application for private revenue ruling from the IRS. I don't think states do them, or I'd do that, too.
Just be smart. Plan on the tax scenario being freaking ugly. Hopefully, with the right guidance you can get yourselves in a position to be pleasant surprised or at least find a way to limit the bleeding. Maynard