<h4><p>Investment Advice or Brokerage Services? – <b>Who Knew?</b></h4>

Investors are bombarded multiple times daily by advertisements from investment advisors offering “independent,” “objective” or “unbiased” advice. Unfortunately, the emperor has no clothes, and investors must be constantly on-guard because conflicts of interest abound and advisors' duties are not what they seem.

There is an important distinction between advisors’ duties to clients. SEC-registered investment advisors such as Kyle Financial Services are governed by the Investment Advisers Act of 1940 (“The Act”), requiring that anyone providing investment advice for a fee has a fiduciary duty to hold clients’ interests above all others. However, the Act provides an exception referred to colloquially as the “brokerage exception,” by which the definition of an “investment adviser” excludes any broker/dealer whose investment advisory services are “solely incidental” to brokerage services and who receives no special compensation for its advisory services. Broker-dealers providing investment advice in accordance with this exception are NOT subject to fiduciary duty under the Act. Such broker-dealers are merely subject to a standard of suitability by which investment recommendations must be suitable, but not necessarily in clients’ best interests.

As such, while most investors view their brokers as “advisors,” brokers are NOT primarily serving as investment advisors. This begs the question as to what constitutes brokerage services. Essentially, a broker-dealer takes orders, executes trades and provides custody services. Brokers also offer investor education, research and recommendations, but such advice is considered “solely incidental” to brokerage services. Similar to car-dealers, broker-dealers may buy securities from clients for their own accounts acting as “principals,” or they may buy or sell securities acting as commissioned agents for others. When acting as broker-dealers, brokers are paid by their clients and, often, by institutions that compensate them based on what clients buy.

As a result, brokerage account agreements are required by the SEC to be accompanied by the following disclosure:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

In a nutshell, in an advisory account, the advisor owes a fiduciary duty to hold clients’ interests above all others. In a brokerage account, no fiduciary duty is owed to clients.

As an SEC-registered investment advisor, Kyle Financial Services embraces its fiduciary duty to hold clients’ interests above all others. Since we do not sell investment products, we have no “dog in the hunt” when it comes to investment recommendations,

Many institutions promoting proprietary products (e.g. banks, insurance companies, etc.) similarly do not have a fiduciary duty to clients. We encourage investors considering the use of an investment advisor to inquire whether the account is a brokerage account or advisory account and inquire whether the advisor has a fiduciary duty to hold Clients’ interests above their own.

Advisor Compensation: Fee-Only vs. Fee-Based

While many investors recognize the conflicts of interest associated with a commission-based compensation structure under which “advisors” are compensated based on the products they sell, many are unaware of the conflicts inherent in a “fee-based” arrangement.

Fee-based advisors charge fees for services rendered, generally calculated as a percentage of assets managed. However, fee-based advisors also may receive commissions based on products that you buy (mutual funds, annuities, insurance products). As such, many fee-based advisors engage in “double-dipping” whereby they charge fees for providing investment advice and also receive commissions based on the products that you buy. A fee-based structure is analogous to paying a car salesperson an advisory fee to sell you a car. Since the salesperson gets paid to sell cars from his dealership, he is obviously going to recommend his dealership’s cars. In this case, he would also charge you an advisory fee for advice on the purchase of the car. Needless to say, the fee-based structure in which advisors charge fees for advice but also receive product-based commissions hardly seems to be in Clients’ best interests

In a fee-only compensation structure, the advisor is solely paid a fee to provide investment advice and receives no product-based compensation whatsoever. As such, fee-only advisors generally have no product biases and provide truly objective, conflict-free advice.

As an SEC registered investment advisor, Kyle Financial Services, Inc. embraces our fiduciary duty to hold Clients’ interests above our own. As fee-only advisors, we are truly objective independent investment advisors. We encourage investors considering the use of an investment advisor to inquire about the advisor’s means of compensation and avoid situations in which advisors receive product-based compensation of any kind.

Please see the attached questionnaire which is a helpful resource for evaluating prospective investment advisors.



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10850 West Park Place, Suite 500
Milwaukee, WI 53224
Phone: (414) 359-2020
Fax: (414) 359-2120
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