Broker-Dealers?
Broker-dealers were established so you could buy and sell securities on the various exchanges. But, the role of the broker-dealer has evolved to the point that helping investors buy and sell securities is a secondary role. The dominant role of a broker-dealer representative is to sell financial products such as mutual funds and annuities. This change in role creates a substantial, hidden risk for investors.
The Stock Broker
Broker-Dealer representatives used to be called stock brokers because that title accurately described their roles. But, that title was limiting in regard to what the brokers could sell so companies began calling them financial consultants. The new title obscured the real role of the reps which was to sell stocks, bonds, mutual funds, and other investment products. Just like financial planner sounded better for insurance agents, financial consultant sounded better than stock broker.
Don't be misled by titles. More than 85% of representatives who work for broker-dealers are paid commissions to sell investment and insurance products.
The "Real" Advisors
A very small percentage of representatives at the broker-dealers have risen above the culture of their industry and companies to become "real" advisors. That means they have have acquired the knowledge they need to help investors achieve their financial goals, work for fees versus commissions, and the investors' interests ahead of their own.
These advisors are rare, but if you are going to hire a broker-dealer representative make sure he or she is a "real" advisor and not a financial consultant who is paid commissions to sell products.
Proprietary Products
Larger broker-dealers produce their own (proprietary) products. Most of the products are very mediocre in regard to their performance and risk characteristics, but they generate two to four times more revenue for the broker-dealers than third party products with superior characteristics. You want to be very cautious when a broker-dealer representative tries to sell you its own products. The question you should ask is "are your recommendations based on what's best for me or what's best for the broker-dealer"? It's a red flag that should cause you to go elsewhere whenever a broker-dealer tries to restrict your choices to its own products.
