Advisory Accounts

Good Advisory accounts:

Advisory accounts are Fiduciaries. They are legally obligated to act in your best interest. Practically, since you are the only person paying the advisor, there are no conflicts. Your advisor works for you and you make a decision to rehire him every day. 

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The investments your wealth manager suggests are dramatically different when you are in an advisory account and not a brokerage account.  ​

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Here is how a typical advisor tells clients about how they get paid.

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Hi Mr. and Mrs. Prospect: working with us is very low risk. You move your money to our custodian which is Fidelity.   On a $100,000 portfolio, you pay us $83 a month ($1,000 annually) and that is all we make.  We only get paid by you. If we put something in your portfolio, it is because we think it is good for you. We don’t have any incentive to sell a certain product to you because we don’t get paid extra to sell product A vs. product B. We only have one type of account, advisory accounts. 

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​​We have to consistently earn your business. If you change your mind for any reason or for no reason, you just tell us to stop billing you and we stop that day.   We don’t get paid any commissions.   If we sell you an alternative investment and you tell us to stop billing you, we stop billing on that alternative investment that day. The investment may bill you until the end of quarter or longer, but we stop that day. We don’t get paid any extra to suggest an alternative investment or a variable annuity or any other of the high commission products. 

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You need to be careful when talking to "hybrid" wealth managers. They are fiduciaries in the advisory accounts and brokers in the brokerage accounts. They are very good at not telling you you when they are switching from one to the other. Don't ask someone if they are a Fiduciary, ask them if they offer both advisory and brokerage accounts. If they do, you need to be on guard. 

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The industry is required to give you the option of putting every investment in an advisory account. 

For retail customers,  the key part is that the behavior of the wealth manager is dramatically different in advisory accounts vs brokerage accounts. Brokers get paid extra to sell certain products and they may put you in products in brokerage accounts when they get paid more. Reg BI came to stop that conflict.  They have to offer you the option to put any investment in an advisory account and tell you the compensation differences. 

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Since they don't get paid extra in advisory accounts, why consider product "A" at all or why put so much in "A". 

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(Reg BI rule Page 34): Recommendations of account types,  We are modifying Regulation Best Interest to expressly apply to account recommendations including, recommendations to open a particular securities account (such as brokerage or advisory)

Expressly:  Explicit, stated clearly and in detail, leaving no room for confusion or doubt.

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If you are a dually licensed financial professional, you need to make a best interest evaluation taking into consideration the spectrum of accounts you offer (i.e., both brokerage and advisory accounts, subject to any eligibility requirements such as account minimums).[Rule page 10)

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A normal conversation about fees would go like this. Hi Mr. Prospect, In the advisory account, I get paid $83 a month or about $1,000 a year. I only get paid by you. In the brokerage account, my firm and I may get a commission up front which varies by the product. We may get a revenue share as well. We may get a ongoing payment from the fund. Whenever I have an investment idea, I will tell you about both brokerage and advisory and you can choose which one is best for you. 

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When he actually makes a recommendation, has to tell you everything that you consider important, including how much he and his firm make in up front commissions. 

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Because many commissions are higher than customers think- they can be as high as 6-8%, investment professionals think twice before telling the customers about how much they are making. The choice is yours. They are required to give you all the information. 

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