Financial Advice versus Financial Recommendations

Did you know there is financial advice and financial recommendations and the difference between the two may determine when you retire, how you live during retirement, and your financial security late in life?

So what is the difference between advice and recommendations? In the real world the answer is not much. I can advise you to do something or I can recommend you do something. There is no difference. However, there are huge differences in the world of personal financial advice that impact you. 

Financial Advisors

In the world of personal financial advice, only professionals who are Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs) are supposed to provide advice. That is because their registration permits them to provide financial advice and ongoing services for fees. For example, the professional advises you to invest in a particular mutual fund. So real financial advisors provide financial advice and they work for fees. That is pretty straightforward.

Sales Representatives

Professionals who hold securities licenses (Series 6, Series 7) are permitted to make investment recommendations when they “sell” investment products. For example, the sales representative recommends you buy a particular mutual fund. If you follow the rep’s recommendation, he is paid a 5% commission for his sales efforts. So reps sell products and they work for commission. This is also pretty straightforward.

The Need for Deception

A lot of investors are not comfortable following the investment recommendations of sales representatives. Wall Street is aware of the concern so its companies came up with a simple solution. Their sales reps tell investors they are financial advisors, hence all of the confusion. This reduces sales resistance and it works because it is verbal, there is no record of what was said, and there are no significant differences between financial advice and recommendations.

Arcane Rules

This should be a simple decision for investors. Do I want an advisor who provides financial advice or a sales rep who makes financial recommendations? However, it is anything but simple. Wall Street makes sure it is blurry because companies benefit when investors are confused.

Protection 

How do you protect yourself? Make sure you select an RIA or an IAR who is compensated with fees. These are differentiating characteristics that are difficult to obscure. Either they have the proper registrations or they don’t. Either they are compensated with fees or they are compensated with commissions by third parties.

Documentation

Another layer of protection for you is to require advisors and reps to provide this information in writing. Now you have a permanent record of the information you need to make the right decision when you select a financial advisor. Your odds of getting accurate information are much higher when there is documentation. Reps are less likely to misrepresent their role if they have to document it.

Other posts from Jack Waymire