The unspoken first commandment of financial planning should be knowing what kind of advisory firm and thus advisor you are working with. I’m going to warn you up front that this article is going to get deep into some financial terminology. I believe however that education is key to investor success. This is not to say that a particular firm or advisor is “bad” per se’, it is to say that they are different and you need to know the implications.

If you use an independent financial advisor to manage your money, you are probably under the assumption that you’re getting guidance that’s genuinely in your best interest. Why? Well, truly independent planners are held to the wealth management industry’s highest standard of financial care known as the fiduciary standard.

This standard requires that registered investment advisory firms (RIA’s) put their client’s interests above their own and disclose and avoid conflicts of interest. The fiduciary standard is the gold standard for investing long-term. It contrasts however with a lesser rule known as Regulation Best Interest (Reg BI), a relatively new rule (asof June 2022) that governs brokerage firms. Reg BI requires only that investment recommendations be in a client’s “best interest” at the time of recommendation and to disclose conflicts of interest, not actually avoid them. Notably, the Reg BI rule does not say that client best interest must come before the brokers. Similar sounding rules, drastically different implications.

The obvious line between these two standards and their care of the client breaks downwith independent advisors who are also brokers (known as “hybrid” advisors or firms). These firms and their advisors ride two horses. They’re both a fiduciary that charges fees, and a broker (non-fiduciary) that can charge both fees and commissions. Such hybrid firms are (according to a 2019 study by Nicole Boyson posted on SSRN -“The worst of both worlds? Dual-registered investment advisers”) the most likely of all types of wealth planners to charge clients with higher fees and steer them into underperforming assets that generate commissions. This study also found that clients of the RIA (Registered Investment Advisor – by definition, a fiduciary) portion of hybrid firms “rarely receive personal financial planning services beyond investment allocation and selection advice, indicating that dual RIAs (hybrids) do not treat RIA clients much differently than brokerage clients.”

What used to be two very distinct business models in the wealth management landscape — commission-based brokerages vs. fee-based advisors — are collapsing and merging together. Unfortunately, investors don’t know the difference or how to differentiate it and thus pay the price. In fact, when an investor asks a “hybrid”advisor if they’re a fiduciary, many will respond, yes, because they are indeed riding the two-horse approach mentioned earlier. The question becomes, when do they act asa fiduciary? Where is the line drawn? Unfortunately, from a fiduciary perspective, this is an inherent conflict of interest built into the “hybrid” model itself.