Financial Advisor (Broker) or Investment Adviser (Manager) ???? One Insider’s View

Advisor with an “o” or Adviser with an “e”. Is there a difference that matters? One way to evaluate or compare competing models of service is to see how the participants spend their time. The below analysis is based on my personal experience of nine years as a Broker (ending April 2013) and five years as a Investment Adviser. 

Customer Service includes meeting and/or talking and communicating with clients about their investments, opening accounts, processing deposits and withdrawals, etc.  Administration and Compliance includes general administration of running the practice, actions to insure compliance with regulations, and the maintenance of appropriate records.

Sales includes activities related to new client acquisition and solicitations of clients to buy investments.  Investment Review, Selection and Management is time spent evaluating present and potential investments and investment portfolios, macro-economic  circumstances considered,  in order to achieve clients’ goals and objectives.   Here is an estimate of time spent:

                                                 Broker     Investment Adviser

Sales                                         50%             5%

Investment Management          10%             60%

Service                                      20%             20%

Admin                                        20%            15%

Notice the dramatic difference between the two models of financial services. 30% of total time attending to client investments versus 80%!  A Broker generally spends at least 50% of his time selling—most of which (70%) is finding new clients.  (20 sales calls per day is the norm.)   Only 10% of the Broker’s time is normally spent analyzing investments and clients’ investment portfolios. Annual reviews, Seminars, and other client communications are often nothing more than an additional sales opportunity. (One major brokerage firm’s training program stipulates that the Broker should spend even more than 50% of his time selling—urging him to delegate the Service activities to a “Sales Assistant”.)  Usually investments sold are either recommended by the home office or are mutual funds recommended by the fund’s sales force known as a “wholesaler”.  An Investment Manager on the other hand spends only about 5% of his time selling with the bulk of his time analyzing clients’ portfolios and evaluating potential investments that might improve portfolio performance.

The Broker’s income depends primarily on the buying and selling of investments, primarily from new clients. His skill set is persuasion and the ability to accept personal rejection. The Investment Adviser’s income in the long run depends primarily on clients’ satisfaction with the performance of their investment portfolios. Most of his business comes from referrals and sales related activities are therefore minimal. His skill set is research, analysis and problem solving.  

Is one model more "expensive" than the other.  In my opinion, the cost over the long term is not much different.  One difference is that by regulation, the costs dealing with an Investment Adviser are more visible and transparent--there is that fee documented by an invoice each quarter.  Dealing with a Broker, the transaction "confirmation" shows the commission that is sometimes quickly forgotten. And, costs associated with mutual funds are buried inside a prospectus and annual report.  

 

My experience is the successful Broker and the successful Investment Adviser enjoy about the same amount of income for the same amount of time spent.  I do believe however that it is the client’s best interest to deal with Investment Advisers rather than Brokers. Like children and flowers, investment portfolios usually develop better with more individual attention---this belief and opinion is strong enough that I stopped being a Broker and work solely now as an Investment Adviser/Manager.

 

This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk.  Most investing involves costs. A complete analysis of these costs should be undertaken before making any choice. Costs, risks and expected results should all be weighed in the balance.