Agents vs. IARs

QUESTION: What is the difference between a broker-dealer agent and an investment adviser representative?

RESPONSE:
An agent of a broker-dealer gets paid to execute securities transactions, which includes selling mutual fund shares. If somebody buys or sells a security, the agent makes a small % of the transaction in the form of a commission. Broker-dealers and their agents only get paid IF somebody buys or sells securities today.

Advisers and their IARs don't get paid to sell securities. They get paid to do financial planning, or to manage portfolios. The adviser bills a % of the assets, which has nothing to do with a level of trading. If the adviser executes 3 or 30 trades in the client's account this quarter, it makes no difference to his compensation. He's billing, perhaps, .25% of the account balance each quarter, period.

I passed my Series 65 exam close to two years ago. If I were a normal person, I would be scrambling right now to get myself registered; otherwise I'll have to take the exam again if I ever want to start an RIA or work for one as an IAR. If I were to register, it would be as an RIA--I would set up an LLC called, perhaps, "Walker Wealth Management" and either charge hourly for my financial planning advice or--more likely--charge 1% of my clients' assets each year in exchange for managing their portfolios. I don't have any clients, though, so I would pay you to go get me some clients, sharing some of the 1% with you. Now, you are my IAR (investment adviser representative), and you get paid a % of assets as opposed to getting paid when the client buys a particular mutual fund. Once you land that client, in fact, you don't have to sell anything to him going forward. You'll be getting a % of his assets while you spend time trying to find more assets for me to manage.

Most reps these days get their Series 7 and 66. This allows them to earn commissions when selling securities (7) and also a % of assets when acting as an IAR (66). Or, some firms have their agents get the 6 and 63 in order to sell mutual funds, variable annuities, and VLI/VUL policies, and then get their 65 later on in order to work the "fee-based" or "IAR" side of the business. Northwestern Mutual (NMFN) actually has different "levels" for their reps. The rep starts out in the bread-and-butter area of life insurance plus the Series 6 and 63. He or she can then sell whole life, term life, variable life, fixed annuities, variable anuities, and mutual funds. Later on, the bravest of the reps go on to take the Series 7 and the Series 66. Once those are passed, the agents can earn commissions on individual stocks, bonds, etc. (Series 7) and--more importantly--they can earn a % of their advisory clients' assets (Series 66). It ends up being four securities licensing exams, but it also gets their people out there selling a lot sooner with the shorter 6 and 63 ordeal, and only puts the ones who are dedicated long-term in front of the big, scary Series 7 and 66.

So, the difference between a securities agent and an IAR is really the same difference that exists between a broker-dealer and an investment adviser. BDs are in the transaction business--they get paid if they can sell a security to a client. Investment advisers are in the advisory business--they get paid to manage the clients' assets on their behalf. That's where their fidicuiary relationship comes from, too, by the way. Unlike a broker-dealer, the adviser does not sell securities to the client. Essentially, the adviser is the client. Seriously.