Many investment advisors market their firms as independent and objective. In reality, not all are.
When it comes to choosing an investment advisor (also known as wealth manager, financial advisor, investment manager, or broker), independence and objectivity are crucial if you want to ensure your advisor is fully aligned with your best interests. When looking for the right financial services provider, most seek a trusted firm with advisors who don’t have conflicts of interest or incentives that may impede on the fulfillment of their needs, goals, and legacy preservation.
These five factors can help you make a wise choice and discern fact from fiction.
1. The fiduciary relationship.
Truly independent registered investment advisors (RIAs) are held to the “fiduciary standard” by the Securities and Exchange Commission (SEC). This standard means the fiduciary — in this case, the RIA — is, by law, required to act in your best interest. Put simply, this means putting your financial goals above that of the firm or advisor.
By contrast, broker dealers who sell investment products and securities are required to register with the Financial Industry Regulatory Authority (FINRA) and are held to what's known as the “suitability standard.” This requires them to act in ways that are merely “suitable” to their clients’ needs, a lower threshold.
The fiduciary — in this case, the RIA — is by law, required to act in your best interest. Put simply, this means putting your needs first.
In keeping with the fiduciary standard and putting your best interest first, truly independent and objective investment advisors are compensated by one source only: their clients. This means the firm always sits on the same side of the table as the client, and that their staff are not compensated from, nor incentivized to sell you, particular proprietary strategies or products.
3. Universe of strategies and products.
There are many different types of investments that can help you achieve your financial goals. Each broad investment type and product — from separately managed accounts, mutual funds, alternative investments to individual stocks and bonds — has its own set of features, risk factors and ways they can be used by investors. Independent advisors work with you to choose the right strategies and best-in-class investments for your particular situation from a full universe of offerings. This is done in the purest sense as your success is their one and only incentive.
4. Due diligence.
With the vast range of international and domestic investment options that an advisor can offer; strategy, research, and due diligence is critical. Does your advisory firm rely solely on independent and objective research or perhaps outsource its investment research function entirely? Or, does it have an in-house research team investigating the products and investment managers in the marketplace, keeping close watch on manager longevity and performance? Truly independent advisors use industry research, but they also augment it with their own intellectual capital and investigation in order to make the most appropriate recommendations to clients.
5. Tailored solutions and holistic service offerings.
Forget having to choose from a limited number of proprietary products or so-called model portfolios. Successful independent investment advisors will build a customized strategy and portfolio based on each client's circumstances, objectives, and needs. They’ll take into account clients’ time horizon, tolerance for risk, cash flow requirements, personal convictions, and other variables to make specific, and often, unique recommendations.
More established independent advisory firms may also offer holistic in-house services beyond investment advisory, which allow them to fully see and understand their clients’ entire financial picture and balance sheet. These services could include estate planning, tax, trust, wealth transfer and advising in several other key areas, such as real estate and insurance. In many cases, a team of advisors will work together for and with clients, acting as quarterback and chief financial officer to help them take advantage of resources they need and not waste time or money on those they don't.
Independent and objective advisors understand you and the vision and goals you’ve set for yourself, your family, and in some cases, your business. Without competing interests, independent advisors can keep those goals front and center especially during times of uncertainty and volatility, helping you make the right changes — or to stay the course — in keeping with your vision.
Unless specifically asked, advisors aren't likely to volunteer that they are incentivized to promote particular products or services. That's why asking the right questions is so important, including:
What’s the nature of the advisor-client relationship? Does the law require you to abide by the fiduciary standard?
How are you compensated? Do you receive commissions or fees from parties other than me?
What investment strategies and products will I have access to if I work with you as my independent advisor?
How do you conduct due diligence on investment products, strategies, and managers? Do you have an in-house research group?
Will I have the support of a team of professionals that will help me manage my assets and access and vet additional services I might need now or as my assets grow?
Will I have ongoing conversations with an advisor and team that knows me and what's most important to my family?
Any advisor you are considering should be forthcoming with fully transparent, honest answers — answers that don't require a key but that speak independently for themselves and on behalf of their firm.