As consumers, before we make a purchase, we read the fine print and compare labels. Unfortunately, it’s not all that easy for investors to compare one financial firm to another. Various firms may seem similar, but there are important differences to be aware of.
“Brand Name” Financial Firms
Much investment advice in the U.S. is dispensed by a few, well-known entities. The entities may come in the guise of large wire houses, regional firms or “boutique” offices, but every broker, banker or adviser working for one of these firms is an employee of that company, with potential loyalties that may or may not complement yours.
Compensation for such firms may come in the form of (1) fees based on your total assets under management; (2) commissions when securities are bought or sold; or, (3) potentially, both fees and commissions. Especially when the compensation comes as commissions, there can be incentives to trade or recommend particular products that may or may not be in your best interests.
This brings us to another important detail. Broker/dealers are overseen by FINRA, a self-regulatory organization that is responsible for overseeing all US stockbrokers and brokerage firms. In the eyes of FINRA, big brokers, investment banks, and similar household names are viewed as principally traders or lenders. This means that the investment advice they offer is held to less-stringent standards. The advice must be appropriate, or “suitable” advice, but it need not be “fiduciary, that is, in your highest personal interests.
Independent broker/dealer firms offer similar services to the firms described above, but the advice is dispensed by independent contractors rather than employees. The broker/dealer firm provides varying levels of support to its team members. The independent contractor must abide by the rules of the broker/dealer’s compliance department and often by various other standards and programs touted by the parent organization.
Registered Investment Advisor Firms
Registered Investment Advisory Firms (RIAs) are comprised of Investment Advisor Representatives whose primary role is to offer fiduciary (highest interest) advice for a transparently published fee. RIA firms are regulated by the US Securities and Exchange Commission, a government agency responsible for ensuring fairness for the individual investor. Because of an RIAs distinct, over-arching responsibility:
– RIA firms do not receive commissions, unless dually registered (which we’ll cover next).
– RIA firms typically turn to third-party custodians to house your assets. The RIA firm oversees and manages your assets, but the transactions and execution remain appropriately arm’s length, independently reported to you as an additional layer of protection.
To further complicate matters, many financial representatives register with both the SEC as a Registered Investment Advisor and FINRA as a broker/dealer and provide advice on both a fee and commission basis. Hybrid advisors can utilize the platforms of both their RIA firm and their broker-dealer to offer clients products and services. In an environment where cost transparency and straightforward relationships are critical components to investment success, we feel that the hybrid model adds a layer of confusion that seems unnecessary.
Discount Brokers and Online Advisors
“Do It Yourself” investors may find discount brokers an attractive alternative if they seek nothing more than the ability to execute their own trades at low costs, without seeking advice from a financial professional.
More recently, online, “robo” advisors have offered investors enhanced tools for conducting research, analyzing performance and informing themselves about particular investment strategies. Such tools may be a step in the right direction for investors who are building initial wealth, but for those who are further along in the investing lifecycle, a personal relationship with a fiduciary advisor can pay for itself in helping develop a well-crafted portfolio that best reflects your personal goals and specific situation. Even more importantly, he or she can help you stick with that portfolio when you may otherwise be tempted to chase a hot trend or panic during a market dip.
Advice That’s Built to Last
Clearly, there are distinct differences among financial firms and the advice they offer. At Core Wealth Management, a Registered Investment Advisor firm, we pride ourselves on providing far-reaching, fiduciary advice, defined by how we are able to assist you in meeting your lifetime goals and objectives. We would welcome the opportunity to learn more about your wealth management needs. Please call us at 561-491-0231 to schedule a complimentary appointment.