Working With A Registered Investment Advisor

The last two blog posts addressed Biased Financial Recommendations as well as Conflicts of Interest in the financial industry. This post will highlight the benefits of working with an independent Registered Investment Advisor (RIA). Think of this post as the third and final in this mini series.

RIAs are business entities registered under the Investment Advisors Act of 1940. They are regulated by either the SEC or their state securities divisions. RIAs are legally required to act in the best interests of clients at all times. If a potential conflict of interest arises, RIAs must disclose and manage to that conflict.

A lot has changed since I passed my first industry exam in 2003. When I started out, most financial advisors were compensated by commissions. Today, most all financial advisors work for a firm that supports transactional product business for commissions as well as "fee-based" business such as financial planning or charging a percentage of assets for investment management. In essence, the employing firm is dually registered as an RIA with the SEC as well as a "broker dealer" with the Financial Industry Regulatory Authority (FINRA).

The evolution of adding an RIA registration is a step towards aligning client interests with advisor interests, but it's not a completely valid solution for mitigating conflicts.

A typical situation is for a dually registered firm and its' advisors to offer a financial plan where they act as an RIA, but within that plan recommend insurance, annuity, and investment products they ultimately sell you directly as a broker.

In this common investor experience, it's difficult if not impossible to know when the advisor is acting as a fiduciary under the RIA model versus acting as a salesperson under the broker model. It's not like the advisor stops the meeting and says "ok, I'm done acting in your best interest, time to sell you some expensive products for commissions". I believe the term caveat emptor applies here.

Wouldn't it be great if advisors really told you the truth at the onset of your relationship. The following is an excerpt from my Website:

I want to help you achieve your financial goals, but I don’t want to be legally required to place your interests above mine because that would be too cumbersome for me to implement and my compensation may be diminished. There may be conflicts of interest that arise from time to time, but I will not disclose them to you. In addition, I don’t want to assume the additional liability that comes with a fiduciary standard. But, I will do my best to help you.

Knowing that, you probably wouldn't do business with this salesperson holding themselves out as an advisor, would you? Any advisor who isn't 100% "Fee-Only", registered with a firm who maintains an RIA registration without the broker dealer affiliation can't escape from the scenario above. Crazy right? Nope. Perfectly legal under current industry regulations.

If it's not clear you should be working an advisor from a Fee-Only firm, please do your own research. Consumer Reports is good place to start. You might also want to peruse my company's advisor hiring guide: Questions To Ask A Prospective Financial Advisor.

When working with a fee-only RIA, there are several benefits In addition to receiving advice 100% in your best interest 100% of the time:

• Straightforward Compensation. Usually a percentage of assets, which is easy to understand, fully disclosed to you in writing, and provides additional incentive for your advisor to grow your assets within the context of your capacity for risk.

• Advice on More Complex Needs. Many independent RIAs specialize in meeting the complex financial needs that often come with significant wealth. Additionally, many advisors specialize in working with a typical type of client; a niche so to speak.

• Integration with a Third Party Custodian. Companies like Fidelity, Schwab, and TD Ameritrade provide platforms for independent advisors to manage client assets via limited powers of attorney. Holding assets are a third party helps avoid situations like those of convicted ponzi scheme criminal Bernie Madoff.

• Focus on Financial Planning. Many RIAs focus on holistic wealth management, which is a blend of investments and financial planning. Some firms, mine included, offer a discount for clients subscribing to both investment and planning services.

• Fewer Clients. Because of the time commitment servicing clients holistically (versus selling them a product and calling it good), most fee only RIAs work with fewer clients by design. This helps ensure personal attention to detail and a regular service schedule.

• Referrals within a Network of Professionals. RIAs generally have relationships with a wide network of professionals who have expertise in a variety of areas including accounting, estate planning, and insurance. These networks allow the RIA to design a comprehensive strategy to meet your individual goals and objectives.

If you're thinking about working with a financial advisor, you're now armed with the knowledge to properly find and vet an advisor who'll always sit on your side of the table. If you work with a company that's not an independent, fee-only RIA, you're probably not receiving advice in your best interest.

If you currently work with a financial advisor, ask me and I can help you assess whether they're affiliated with a fee-only RIA or something else. Use the Shoot Us An Email contact form in the footer below to start a conversation.