Is Your Financial Advisor Independent?

Gary Alt |

Question:  I read your column last week about how a financial advisor could add value to my investment account.  I see advertisements by advisors emphasizing that they are independent.  What does that mean?

Answer:  Forty five years ago, there were few independent advisors.  If you wanted to invest you would go to a stockbroker.  However, in 1975 the Securities and Exchange Commission put an end to fixed brokerage commissions.  After that, company’s like First Omaha Securities, Jack White & Company, and Charles Schwab & Company were formed to sell investments directly to investors at discounted commissions, with no stockbrokers serving as middlemen.  

Investors found this new ability to buy investments without a stockbroker’s help a welcome opportunity, but with a dark side.  It was easy to buy, but not easy to invest wisely.  They didn’t want to ask for help from a stockbroker because stockbrokers, in the eyes of this new breed of investor, were salespersons pushing products for commissions.   This need for help opened a whole new market for advisors who didn’t work for brokerage firms, were not under any pressure to sell a particular investment product, and whom an investor could hire to give impartial advice with no conflict of interest. 

1n 1985, the Certified Financial Planner Board of Standards (CFP Board) was founded in Denver, Colorado.  The CFP Board began certifying financial advisors who could meet rigorous standards of education, examination, and experience.

In 1987, Charles Schwab and Company started the Financial Advisors Service--now known as Schwab Institutional. 

Schwab Institutional started offering access to thousands of investments to investors through certified and other independent advisors who were not employed by a brokerage.  Independent advisors were able to offer these investments to clients without a stockbroker’s conflict of interest.  The investor could pay the advisor a fee to manage his account, and Schwab Institutional would collect transaction fees on trades recommended by the independent advisor.

Ever since then, more and more investors have been seeking independent advice, and assets held at Schwab Institutional and other "discount brokerages" that have since emerged, such as T.D. Ameritrade (formerly T.D. Waterhouse), Fidelity and others, have ballooned.  

Traditional stockbrokers who work on commissions have been losing clients to fee-only independent advisors.  As a result, many have morphed their business model to include fee-based advice and changed their titles from stockbrokers to financial advisors and now to wealth managers.

Meanwhile, big banks were pressuring Congress to allow them to underwrite and trade investment securities.  In 1999, Congress opened the door.  They passed the Graham-Leach-Bliley Act, rescinding the Glass-Steagall Act that had been in place since 1933 and had kept Wall Street separate from depository banks. Before 1999, banks had to at least pretend that the investment salesperson in the corner office in the bank’s branch was independent.  But once the Glass-Steagall Act wall came down, that pretense was gone and bank employees were free to sell bank-sponsored, full-commission investments to bank customers. 

Today you can choose between three broad categories of financial advisors:

  1. Registered Investment Advisors who are Independent, fee-only, and have no brokerage firm affiliation.

  2. Pseudo-independent advisors, sometimes referred to as "hybrids."  These advisors are independent contractors who work through an indpendent brokerage firm.  They usually offer fee-based services as well as sell investment or insurance products in which they earn a commission.

  3. Fee and commission advisors who are employees at banks, regional, national, and international full-service brokerage firms.

Monterey Private Wealth is strictly a fee-only wealth management firm and acts as a fiduciary to our clients.  We do not earn commissions or take "soft-dollars" from the investment products that we recommend to our clients.  This allows us to offer unbiased investment advice to our clients. Please take the time to read our "Fiduciary Promise" on our website.  

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to