Wealth Manager vs. Registered Rep

wealth managerTradeoffs of fee-based Wealth Manager vs. Commission Earner

As a registered representative, you sell on commission. The market is moving away from this type of compensation, especially more affluent clients. They don’t want to deal with a sales person. It’s one thing when a professional sells themselves (e.g. a fee-based registered investment advisor) and another when a registered rep wants to sell a product. The affluent resist the product orientation.

As a registered rep, you generally get paid up front for the sale of a mutual fund, a variable annuity, etc.–you get a commission. As a fee-only wealth manager, you never get a commission (you cannot unless you are also a registered rep, covered below). As an RIA, you get fees for everything you do.

As an example, you manage a client’s mutual fund portfolio. You will no longer put them in those funds that registered reps use with chokingly high fees, 12b-1 fees, high turnover and enough inefficiency to make a knowledgeable investor cringe. Rather, you will buy for them low load institutional funds from Dimensional Fund Advisors, Vanguard, Fidelity or ETFs. These funds don’t have 12b-1 fees, the turnover is very low, there is no style drift. There is a 2% to 2.5% advantage over the funds sold by registered reps. You will charge your fee of 1% annually to manage the portfolio. The client saves money, they get better products and they get you.

If you want to sell a variable annuity, similarly, you won’t get up front commission. You will collect fees over time, and there are many fee-based variable annuities on the market. In fact, one of the common misconceptions by registered reps is that they won’t be able to do business the same way because they won’t have access to products. There is a full line of registered advisor products produced by all major fund families and insurance companies.

Can you collect fees and commissions?

Yes, but this requires that you have a broker dealer and either one of the following two conditions is true:

  • Your broker dealer is a registered investment advisor and under their RIA certificate, you operate as an Investment Advisor Representative (IAR) and collect fees.
  • Your broker dealer allows you to obtain your own registered investment advisor certificate.

In both cases, your BD is responsible for your actions when you do fee-based work. The FINRA requires that they monitor you, and will typically need to audit your work and will charge you 10% to 20% of your fee income for that oversight and liability (see: FINRA Special Notice to Members). Because of the BD’s extra work and exposure, there are not many BDs who will allow you to operate as an Registered Investment Advisor in a “full blown” capacity.

For example, they may allow you to take fees for financial plans, but not asset management fees. Or they may allow you to take asset manager fees to refer clients to a third-party manager on their approved list, but you won’t be able to use other managers or manage the portfolios yourself.

Generally, you need to make a choice in your business. Are you a commission-based broker/planner or a fee-based wealth manager?

Remember that nothing above has anything to do with fixed insurance business. That is totally separate. You continue to do your fixed insurance business however you like–on commission or, there are many fee-based variable annuities, universal life and other products on the market. If you go totally fee-based with everything you do, then you can market yourself as “fee-only” wealth manager and join NAPFA.

Tools for those who want to become
Registered Investment Advisors


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