Stock brokers have licenses that limit them to selling investment products such as mutual funds and securities. The licenses do not permit them to provide financial advice or ongoing financial services such as performance measurement reports to investors.
The sole method of compensation for a stock broker is a commission that is deducted from your account or is paid by the company that manufactures the investment products – for example, a mutual fund family.
Licensing and compensation are two identifiable characteristics that create a major marketing problem for Wall Street stock brokers. According to a 2013 survey that was conducted by Paladin Registry, 92.7% of investors do not want salesmen investing their assets.
You have seen the headlines. The Wall Street solution is not to tell the truth. It obfuscates the roles of stock brokers and withholds information that would help investors make better decisions.
Wall Street has made sure there are no regulations that limit the titles that stock brokers use to sell investment products: Financial Planner, Financial Advisor, Investment Advisor, and Financial Consultant. They claim to be legitimate advisors to reduce your sales resistance.
The Bigger Lie
Wall Street has also made sure there are no mandatory disclosure requirements that diminish the impact of this sales strategy. Stock brokers say they act in the investors best interests, but they do not disclose anything that negatively impacts their sales success. It is your sole responsibility to ask the right questions and know good answers from bad ones.
The Really Big Lie
Wall Street obfuscation does not stop there. Stock brokers make sales recommendations. Financial advisors provide advice. Do you know the difference between a recommendation and advice? That’s ok, no one does, which means this Wall Street strategy is working to perfection. It has blurred another major distinction between a stock broker (salesman) and a real financial advisor.
The Bottom Line
You will not buy what they are selling if they told you the truth.
There is a Solution
You are paying a stock broker or financial advisor for his knowledge, advice, and services. You hope the advice will help you achieve your financial goals.
You are not paying to be sold a product, but that is exactly what is happening when you invest your assets with a stock broker.
All you have to know are two characteristics that will help you identify stock brokers so you can avoid them.
- They hold securities licenses (Series 6, Series 7), and
- Their only method of compensation is a commission that is deducted from your assets or paid by a third party (mutual fund family).
Contrast that to real financial advisors. They are Registered Investment Advisors or Investment Advisor Representatives. The registrations permit them to provide advice and ongoing services for fees. These advisors are also financial fiduciaries, which means they are held to the highest ethical standards in the financial services industry.