Who is your financial adviser working for, anyway?
'My financial adviser says that I should . . ."
That may be the most common phrase in all the reader mail I receive. The suggestion may be about mutual funds, stocks or bonds, CDs at a bank, variable annuities, or portfolio management. But someone gets called a financial adviser for making a suggestion.
Lots of people wear that hat. I mean lots.
Want to guess how many people are called financial advisers? Cerulli Associates, a Boston firm that studies the financial-services industry, recently put the number at nearly 250,000. That's in the ballpark with the population of St. Petersburg, Fla.
Cerulli can also tell us where we're most likely to find someone who calls himself a financial adviser. But two things are unclear.
First, who is the adviser working for - you, or the firm that provides the business cards, telephone, and desk? Second, should he or she really be called a financial adviser?
Cerulli says you can find people called financial advisers in six major places. Each place represents a channel of distribution. Here are the basic numbers:
National full-service brokerage. There are 69,000 advisers at national full-service brokerage firms such as Merrill Lynch.
Regional full-service brokerage. There are another 14,000 at the smaller regional brokerage firms such as Morgan Keegan.
Independent broker/dealers. There are 98,000 at independent broker/dealers such as Raymond James Financial.
Bank brokerage. There are nearly 16,000 at bank brokerage operations such as Bank of America.
Insurance broker/dealers. Insurance broker/dealers add another 34,800 at firms like AXA advisers, NYLIFE Securities and Mass Mutual Investor Services.
Add them all up, and you've got 232,000 salespeople who work for their firm, not you. Another 23,000 are registered investment advisers. But nearly 10,000 of those are also broker/dealers included in the 98,000 count above.
That leaves about 13,000 registered investment advisers.
A registered investment adviser is the only person in this group who has a sworn fiduciary duty to put your interest first. The others provide what is deemed "suitable" investments.
What does this mean for most of us? It means about 95 percent of all the people who are called "financial adviser" are working on commission. More important, they are part of what I call the Legacy Investment Distribution System. Like the legacy telephone system, legacy investment providers have a system to protect - theirs.
By itself, this isn't an evil plot. I know some very fine brokers who have built their book of business by guiding investors into low-expense mutual funds, such as the American Funds family. But they are a rarity.
It's good to understand that most of this army of financial advisers is organized to extract about 2 percentage points a year, often more, from your money. About half of that money goes to the, er, financial adviser. The other half goes to support the Sultans of Finance who run the marketing machinery of brokerage and insurance firms. If these folks were doctors, researchers would observe that the cost of their prescriptions is more harmful than doing nothing.
Will getting your advice through a registered investment adviser guarantee better investment advice?
No. But it will guarantee a fiduciary relationship. That's one where the adviser has sworn to put your interest first at all times, one where making a sale isn't what stands between him and a top-producer trip to Hawaii. Unfortunately, many registered investment advisers are nearly as expensive as the legacy distribution system. As a consequence, your long-term after-expenses return can be much reduced.
What's the solution?
Education. Learn enough to use the independent investor distribution system - the mutual fund firms and discount brokerage firms that can cut your investment expenses by 90 percent.
Scott Burns is a syndicated columnist. He can be reached at scott@scottburns.com.
