We Are Not Brokers

There are many variations of financial advisors.  Some are compensated solely by fees, some work for commissions, and some work for both fees and commissions.  Some call themselves advisors and some are known as registered representatives or brokers.  Tarbox is a Fee-only Registered Investment Advisor (RIA).  What does this mean, and how is that different from a broker?

We-Are-Not-Brokers-TermsFee-only RIAs are required to follow the fiduciary standard, which, in simplest terms, says that the fee-only advisor must put the client’s best interest first – ahead of the RIA’s own best interest.  Tarbox not only adheres to the fiduciary standard, but holds itself to the higher standard of stewardship.  Good stewardship doesn’t come from law, it is a self-imposed higher level of care that embodies a passion and discipline to protect and promote the long-term well-being of our clients.  We don’t stop at meeting the bare minimum of rules and regulations, but practice ethical and prudent decision-making with complete transparency.

Commission-based advisors, also known as brokers and registered representatives of securities firms, have a much lesser standard.  They are required to recommend investment products that are suitable for a client, but not necessarily in the client’s best interest.

It may seem like a nuanced difference, but the recommendation of mutual funds provides a good example.  Say a broker recommends a U.S. large-cap stock fund.  The suitability rule states that the broker “must have a reasonable basis to believe” that a transaction or investment strategy involving securities that he/she recommends is suitable for the client.  This reasonable belief must be based the client’s age, other investments, financial situation, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance.  The broker can choose from several different U.S. large-cap stock funds that meet these suitability criteria.  One pays a 5% commission, one pays a 4% commission, and one pays no commission.  Because they are all suitable, the broker can sell the fund that pays them the most, even though the higher commission is not in the client’s best interest.


We-Are-Not-Brokers-Side-QuoteWhat about advisors paid with both fees and commission, sometimes referred to as hybrid or “fee-based” advisors?  They wear two hats.  They can manage a client’s portfolio for a fee under the fiduciary standard and sell the client an investment and earn a commission under the suitability standard.  So one minute, a dually-registered advisor could be recommending a product that is suitable for a client’s needs and the next he/she could offer investment advice that is held to a fiduciary standard.  This can be confusing for investors.

It is easy to quickly look up either type of advisors’ records.  RIAs, like Tarbox, must register with the Securities and Exchange Commission (SEC).  These registrations can be found on the SEC’s Web site through its Investment Adviser Public Disclosure page.  Investment advisors are required to disclose more information than their broker counterparts, including the amount of money they manage, the number and type of clients they work with, and types of services offered.

We-Are-Not-Brokers-Wall-Streer-JournalTo check a broker, there is a database on the Financial Industry Regulatory Authority (FINRA) website called BrokerCheck.  FINRA, which is a self-regulatory organization that oversees brokerage firms and their employees, maintains the database that stores some vital information on about 1.3 million current and former FINRA-stockbrokers and 17,000 current and former FINRA-registered brokerage firms.  BrokerCheck’s files disclose information about a stockbroker’s employment history (in and out of the financial services industry), where he/she is registered, licenses held and, perhaps most importantly, it lists most investment-related investigations, disciplinary actions, arbitrations, criminal records, and bankruptcies.

Tarbox’s interests are fully aligned with its clients’ interest in keeping costs low and fully optimizing the portfolio in relation to its risk and expected return.  We know that investors are better served by an independent firm that provides extremely focused attention to the increasingly more sophisticated investment and planning needs being faced in today’s ever changing environment.

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