Why Work With an Investment Advisor in Lieu of a Broker-Dealer?

Hiring the right personnel and firm is one of the most important financial decisions that one can make. The difference between a broker-dealer and a registered investment advisor (RIA) is often discussed but frequently misunderstood. What services are provided and how is compensation structured? What are the regulatory differences? What potential conflicts exist when rendering financial advice? For a detailed analysis of a U.S. centric view of this topic, please refer to the “Study on Investment Advisors and Broker-Dealers” as required by Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

A registered investment advisor is held to the “fiduciary standard.” The fiduciary standard is a legal requirement that advisors act in the best interest of their clients. In addition, a fiduciary has a legal responsibility to place their client’s interests before his or her own. Fiduciaries are responsible for educating clients about their qualifications, services, potential conflicts of interest, full disclosure regarding compensation and revealing past disciplinary actions. It is interesting to note that the most trusted professionals are held to the fiduciary standard. These professionals include doctors, certified public accountants and attorneys. Shouldn’t your financial advisor be held to the same standard?

In contrast, the broker-dealer model maintains that employed advisors are held to a less stringent “suitability standard.” This definition requires recommended investments and related services to merely be suitable for clients. The broker-dealer platform offers products and services that have varying compensation benefits to the broker-dealer and for the advisors of the broker-dealer. For example, an advisor at a broker-dealer is often paid a higher amount in the event a client purchases investment A over investment B. In this situation, an undeniable conflict of interest exists under the broker-dealer model and within the suitability standard framework. With many of the large financial institutions currently in turmoil, it is no secret that their advisors are under excessive pressure to generate profits through higher revenue transactions for themselves and for their broker-dealers. 

Advisors working under the fiduciary standard are free to focus on solutions that help assure a client’s needs are objectively met. This method is based on an advisors commitment to sound and prudent investment processes and is guided by the fiduciary standard. The role of an advisor working under the fiduciary standard is to procure financial solutions that are based on need. Holistic strategies are put in place to complement client goals, timeframes and aversion to risk.

When choosing an objective fiduciary advisor, one should investigate two additional considerations. The first is to hire an advisor that operates under a fee-only compensation model. A fee-only relationship exists when a percentage of assets under management are assessed by the advisor for his or her ongoing services. A fee-based relationship is important as it positions the advisor as a partner with the client. Assets that rise in value will also benefit the advisor. Second, it is important to work with an advisor that utilizes the services of a third party custodian. This is optimal because the third party custodian is tasked with safeguarding assets and facilitating transactions. These responsibilities are completely separate from the advice provided by the fiduciary advisor. Under this model, it no longer benefits the advisor for placing clients in investment A over investment B.

There is no “one size fits all” cross-border financial planning strategy. Therefore, it is important to partner with a qualified team of tax, legal and investment professionals who specialize in Canadian and United States cross-border transitioning and asset management. Stay tuned for part two of “Exiting the U.S. for Canada?” or contact Cardinal Point Wealth Management at http://www.cardinalpointwealth.com/US/contactus.html to review your unique situation.


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