Registered Investment Advisors
In the world of investment advice, financial planning and asset management there are a wide array of options for individuals, families, businesses and retirement plans. Among the most common and most recognized are brokerage firms. Think of Merrill Lynch, Edward Jones, Raymond James, DA Davidson, etc… A brokerage firm (often referred to as a broker-dealer) facilitates transactions for clients for a commission while also transacting for its own account. As part of transacting for its own account, many brokerages sell products such as mutual funds and other types of investment products. Within a brokerage firm are many divisions, one of which is a financial advisory or wealth management division. Within the financial advisory/wealth management division is an army of advisors whose sole objective is to bring in new money, manage existing client accounts and sell the brokerage firm’s products and services.
A Registered Investment Advisor (RIA) is another type of financial advisor or wealth manager. While RIAs work with brokerage firms for custodial services and for trade execution, RIAs are typically independent of brokerage firms. In other words, they’re not required to conduct all of their clients’ business with one firm and they’re not required to sell a brokerage firm’s products and/or services. Similar to advisors at brokerage firms, RIAs assist clients in achieving their financial goals through planning, portfolio construction and portfolio management.
RIAs have a legal obligation to put their clients’ interests first. This legal obligation is referred to as a fiduciary obligation. While I’m sure most, if not all, advisors at brokerage firms want their clients to succeed, they’re not legally required to act in their clients’ best interests.
What does it mean to act in a client’s best interest? In the world of wealth management, various factors contribute to an individual’s best interest. Some of the more common considerations include an appropriate asset allocation based on a client’s return objective, risk tolerance and age; a reasonable turnover rate within the portfolio that doesn’t lead to excessive fees and/or taxes and investment products that are suitable for an individual client’s personal situation and that don’t charge excessive fees. In the end, the goal of every financial advisor and wealth manager should be to help their respective clients achieve each client’s individual goals. RIAs have a legal obligation to work toward this end while advisors at brokerage firms do not.
RIAs are required to disclose the nature of their business, fees and other forms of compensation and conflicts of interest in a regulatory brochure referred to as a Form ADV Part 2A. Every RIA is required to have an up to date regulatory brochure on file with its regulator (SEC or State Regulator) that can be accessed by anyone with an internet connection. Additionally, RIAs are required to deliver the regulatory brochure to all prospective clients prior to entering into a formal business relationship. This step gives a prospective client the opportunity to become familiar with the important details of an RIA’s business and philosophy to determine ahead of time if a relationship would be a good fit. Advisors at brokerage firms are not required to disclose such information.
Most RIAs are fee-only, meaning they only receive compensation from a management fee, which is generally a percent of the money under management. A fee-only advisor doesn’t receive commissions or fees from securities trades or product sales. As a result, fee-only advisors don’t have any inherent conflicts of interest and tend to have their interests aligned with their clients’ interests. Specifically, a fee-only advisor’s compensation increases as his/her clients’ account balances increase. Conversely, a fee-only advisor’s compensation decreases as his/her clients’ account balances decrease.
Fee-based advisors may charge fees and commissions based on the products they sell. Most advisors at brokerage firms are fee-based advisors, collecting a management fee and commissions on the products they sell, whether the products are their firm’s or another firm’s.
As a result of being independent of a brokerage firm, RIAs have a lot of flexibility in the brokers they use for custodial services and trading, the investment products they select on behalf of clients and the overall solutions they provide clients. Since each client’s needs are unique and there isn’t a one-size fits all solution, an RIA is very well equipped to personalize financial solutions for all types of clients (individuals, businesses, retirement plans, etc…) to meet their unique needs and situations. This type of flexibility benefits clients much more than cookie cutter solutions offered by some advisors.
In summary, RIAs have a lot to offer clients. Whether it’s the legal obligation to act in clients’ best interests, firm transparency, a client friendly fee structure, or flexibility in best meeting clients’ needs, a competent RIA’s value proposition is among the best available to any person or entity looking for wealth management services and is worthy of serious consideration.
NOTE: My firm, Glacier Investment Management, is a Registered Investment Advisor with the state of Montana.