Disclosure: Understanding The Different Ways of Working with Your Commonwealth Advisor
There are two different types of services your advisor can provide to you: brokerage and investment advisory servies. What's right for you depends on your individual financial situation and investment objectives.
WHO IS COMMONWEALTH FINANCIAL NETWORK®?
Commonwealth functions as both a broker/dealer and a Registered Investment Adviser:
- A broker/dealer, as defined by the Financial Industry Regulatory Authority, is a "company that is in the business of buying and selling securities—stocks, bonds, mutual funds, and certain other investment products—on behalf of its customers (as broker), for its own account (as dealer), or both."
- A Registered Investment Adviser, as defined by the Securities and Exchange Commission, is "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities."
As an independent dually registered broker/dealer and investment adviser, Commonwealth supervises and processes the investment business of the financial professionals who affiliate with us. These professionals (often called advisors) are independent business owners who provide financial guidance to clients looking for assistance. Commonwealth functions as the unseen back office that processes client transactions and provides the technology platform, research capabilities, and other support services to help advisors serve clients.
Because the securities and investment advisory industry is heavily regulated, financial advisors must register with a broker/dealer and/or investment adviser to ensure supervision and a clear chain of responsibility. Commonwealth is responsible for following state and federal securities laws and regulations, as well as for ensuring that our advisors:
- Also follow securities laws and regulations
- Are properly registered and licensed
- Correctly complete and maintain paperwork
- Demonstrate responsibility
- Disclose or avoid conflicts of interest
When you invest through a brokerage account, your advisor receives a commission for buying or selling securities products. This compensation occurs on a transaction basis. As a result, a brokerage relationship may be best for clients who are seeking a pure buy-and-hold strategy. In addition, through a brokerage relationship, your advisor may provide education, research, and information about financial products, but he or she is not obligated to provide ongoing investment advice, which is a duty of an advisor to clients in an advisory relationship. Also unlike an advisory relationship, you may not provide your advisor with discretion to buy and sell securities for you in a brokerage account; instead, you must approve each transaction prior to execution.
The commissions you pay will depend on the type and nature of the security purchased or sold in your account. There are, for example, several different share classes of mutual funds, and each comes with different sales charges and expenses (see below chart). Brokerage accounts also will incur certain account fees. (Please note: Advisory accounts may incur certain account fees as well.) For a list of fees charged by Commonwealth for brokerage accounts and related services, please see the Brokerage Fee Schedule.
INVESTMENT ADVISORY SERVICES
Commonwealth’s suite of investment advisory services is designed to accommodate a wide range of client investment philosophies and objectives. As is the case with brokerage services, advisory services clients have access to an array of securities products, including, but not limited to, common and preferred stocks; municipal, corporate, and government fixed income securities; mutual funds; exchange-traded products (ETPs); options and derivatives; unit investment trusts (UITs); and variable insurance products.
Commonwealth's advisory services platform also allows advisors to offer clients a number of managed account investment options through its Preferred Portfolio Services® (PPS) program and unaffiliated third-party asset manager (TPAM) programs.
In contrast with a brokerage account, where you pay a commission on a transaction basis, with an advisory, or "managed," account, you pay a fee that is typically based on a percentage of the value of the assets in your account.
Advantages of managed accounts include:
- You pay no commissions or sales charges.
- You can provide your advisor with discretion to manage your account on an ongoing basis.
- Your advisor has a fiduciary duty to act in your best interest.
Disadvantages of managed accounts include:
- Your asset management fees may be greater than comparable transaction-based commission charges.
- The availability of certain product types (e.g., variable annuities, alternative investments) and features may be limited.
Comparison of Share Classes and Expenses in Brokerage and Advisory Accounts
The chart below explains a few general differences among the most commonly used mutual fund share classes, as well as compares them with advisory accounts.
|Class A Shares||Class C Shares||Share Class Varies|
|Up-Front Sales Charge||Yes; typically around 5.75%||C shares typically have 1% initial sales charge||None|
|Annual Internal Fund Expenses||Lower than C shares; higher than most advisory share classes; internal expenses vary; typically pay advisor 0.25% annual 12b-1 fee||Higher than A shares and most advisory share classes; some C shares convert to A shares after a predetermined hold period; internal expenses vary; typically pay advisor 1% annual 12b-1 fee||Lower than C shares; often lower than A shares; internal expenses vary; do not pay advisor 12b-1 fees|
|Deferred Load||None, unless subject to short-term redemption fees per the fund prospectus||Generally 1% if shares redeemed within 12–18 months of purchase||None, unless subject to short-term redemption fees per the fund prospectus|
|Might Be Best for Investors Who—||Intend to hold the fund long term; want lower annual expenses; can invest large amounts of money to reduce initial sales charges||Anticipate a shorter time horizon; want flexibility of free redemptions after 12–18 months of purchase||Do not want to pay initial or deferred sales charges; prefer to pay an annual fee for ongoing advisor asset management rather than a sales charge or 12b-1 fee|
CONSULTING AND FINANCIAL PLANNING SERVICES
Commonwealth advisors also have the ability to provide fee-based consulting and financial planning services under Commonwealth's Wealth Management Consulting and Retirement Plan Consulting programs. For example, you may engage your advisor to review or provide consulting services on assets or accounts you maintain at other financial institutions, generate a comprehensive financial plan, provide education planning services, work with you on an estate plan, or help address your risk management needs.
MAKING THE CHOICE THAT'S BEST FOR YOU
Commonwealth encourages you to discuss your options and the many differences between brokerage and advisory relationships with your advisor. It's important to understand all associated costs and the benefits of each option so you can decide which types of accounts and services may be best suited for your unique financial goals, investment objective, and time horizon.