This is a common question because many people believe that all investment people are the same. After all, it’s the same financial market, and they all buy stocks. But is there a difference?
Investment Advisor vs Brokers
Propel Financial Advisors, LLC, is a registered investment advisor, not a broker at all. Investment advisors and brokers are covered under separate sections of the law and are very different. The key difference is that investment advisors owe a “fiduciary duty” to their clients, and brokers do not.
Fiduciary duty means that investment advisors must always act in the best interest of clients. If they have a choice between an investment that would benefit the advisor more and one that is simply better for the client, they have a legal duty to only choose the investment best for the client.
Brokers, on the other hand, are employees of large broker-dealers, whose purpose is to maximize profits for its owners or shareholders. They must buy “suitable” investments for their customers, but their legal duty is to maximize profits for their companies. This is very different than acting as a fiduciary.
Our universe of available investments at Propel is as broad as we can find and not limited to what is available at one firm. Contrast this with a local broker whose available choices are limited by his employer, who is influenced by what the branch manager sees as most profitable to the parent company, and who owes his financial success to performing in the way his employer requires. Our only boss at Propel is you, and that’s a big contrasting advantage.
Independent investment advisors have been gaining market share for many years. See Why RIA’s are the Future of Financial Advising, Investment News, July 31, 2017 which cites The Cerulli Report: U S Advisor Metrics 2016 shown below. The reasons for these gains is summarized in a more recent article in Forbes: Fiduciary Investment Advisers May Add More than 6% in Value by Robert Lawton, August 13, 2018.
Lawton believes all forms of advisors add about 4% in value added compared to individuals going it alone. However, brokers, then often charge 12b-1 fees in mutual funds, which is another 0.5%. The ability of fiduciary advisors to choose the lowest cost share classes of mutual funds amounts to another 0.5% difference. Lower costs on trades at brokerage firms is another 0.25%. The incentive of obtaining compensation only from clients and not from hidden fees or other compensation from others in the industry adds another 1.25%. Adding those together, he believes registered investment advisors add 2.5% more than non-fiduciary advisors, in addition to the 4% gained compared to doing it yourself.
At Propel we have chosen to organize as a registered investment advisor, which we believe is a superior way to do it. We don’t receive any 12b-1 fees, we seek out the lowest cost mutual fund share classes, we choose brokers to execute trades at lower costs, and we receive no hidden or other fees whatsoever from within the industry. We are paid only by our clients, and that gives us the broader choices and the independence to make better choices. We believe that gives us the ability to do a better job for our clients.