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Are You a Client or a Customer?

CLICK HERE TO LISTEN TO RICK’S WEEKLY COLUMN: Download 022106_are_you_a_client_or_a_customer.mp3

Take this simple test: What is the difference between a financial planner and a broker who works for a major financial institution?

If you answered, “Nothing,” you are wrong. Don’t feel bad, though; eight out of ten people would agree with you.

There are two major differences, and they are important. First, a stockbroker is a sales person, registered with the NASD. A financial planner is an advisor, registered with the SEC. Stockbrokers make their living selling you financial products. Financial planners make their living disbursing unbiased advice. Stockbrokers get commissions; financial planners charge fees.

To a stockbroker, you are a customer. To a financial planner, you are a client. This is much more than a semantic distinction. If you are a customer, the broker who sells you goods or services works for the company you’re buying from. If you are a client, the financial planner works for you.

Regardless of what the TV ads and brochures say, to stockbrokers working for one of the major financial firms, you are simply a customer or a prospect. The law requires they treat you fairly. The law also requires they put their firm’s interests above yours. Their loyalty is to the company.

Conversely, financial planners are duty-bound to put your interests above their own or their firm’s. This is called a fiduciary responsibility to you. It is the same relationship you have with your attorney or accountant.

Secondly, a stock broker typically sells only investments or insurance. A financial planner will advise you on those areas and many more, including asset and income protection, tax strategies, cash flow management, legacy planning, retirement planning, life aspiration coaching, and improving your relationship with money.

Beginning January 31, 2006, the SEC has a new rule aimed at clearing up the confusion. This rule requires stockbrokers to disclose whether they are acting as a salesperson (where you are the customer) or a financial planner (where you are the client). In the latter case, they and their firms will need to register with the SEC and provide all the conflict-of-interest disclosures required by law, something the big brokerage firms loathe and have fought hard to avoid.

For many years, large firms like Merrill Lynch, Dean Witter, A.G. Edwards, Edward Jones, Piper Jaffrey, and others have spun their advertising and communications to leave the illusion that they were doing financial planning. This illusion is one of the primary reasons the public assumes investment advisors and financial planners are the same.

To add to the confusion, the representatives who work for these firms have titles like “account executive,” “certified senior advisor,” or “financial advisor,” when the bottom line is that they are salespeople. They don’t make a cent unless you buy something from them that pays them a commission. Even products that you are told don’t have a commission unless you sell them prior to a stipulated number of years, really have commissions.

On the other hand, a true financial planner is registered with the SEC and has a fiduciary interest to place your interests first. The financial planner must disclose any conflicts of interest by providing you something called an ADV. If you want to know whether your financial advisor is a salesperson in financial planner’s clothing, you can go to the SEC’s homepage here.   Put in the name of your broker or financial planner. If he or she is registered, you will be able to view the ADV. You can also do a search by state of financial planners registered with the SEC.

Given the choice, most people would rather be clients than customers. Finally, the SEC has provided a way to find out whether that’s really what you are.

(For a more detailed discussion of this topic, see the “Money and Investing” section of The Wall Street Journal for January 28th, 2006.)

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3 Responses to Are You a Client or a Customer?

  1. Darla Creal February 17, 2006 at 6:57 am #

    This is a great article, Rick and very easy to understand. It has just the facts, without bias. Thanks

  2. Licia McClung February 17, 2006 at 8:55 am #

    I think this is information that definitely needs gets out there for everyone to understand. Glad to see you wrote this article.

  3. Coffe Girl February 17, 2006 at 2:31 pm #

    Rick,

    Very interesting article. I did not know all of the distinct differences myself! Knowing someone is truly interested in my well-being, and not just trying to sell me whatever product will give them the highest commission, would be worth every penny. If my boss would give me a very large, well-deserved raise, I too would likely engage your services!!!