Many investment advisors market their firms as independent and objective. In reality, not all are.
When it comes to choosing an investment professional (i.e., an investment advisor, 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 can help them fulfill 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, when possible, avoiding conflicts of interest or disclosing unavoidable conflicts. This relates to the relationship as a whole, not just any particular investment. 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 held to a “best-interest” standard by the SEC under Regulation BI. Regulation BI became effective in June 2020 and requires a broker-dealer to act in the best interest of retail customers when making a particular recommendation, without imposing a fiduciary duty. Unlike the fiduciary standard, it doesn’t apply to the relationship as a whole, nor does it require avoiding conflicts of interest.
2. Compensation
In keeping with the fiduciary standard, truly independent and objective investment advisors are compensated by one source only: their clients. This compensation usually takes the form of a fee, often based on a percentage of the assets being advised upon, and this fee is fully disclosed to the client. This approach to compensation means the firm and their advisors aren’t compensated from, nor incentivized to sell you, particular proprietary strategies or products. Only when compensation is fully disclosed can a client decipher if they’re getting value for the services received. Unfortunately, if advisory firms or the advisors themselves are directly compensated through commissions or other incentives because of the products they use, there may be a conflict of interest to utilize products that pay a higher incentive.
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, and 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.
4. Due diligence
With the vast range of international and domestic investment options that an advisor can offer, strategy, research, and due diligence are 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 the client’s personal chief financial officer to help them take advantage of resources they need, while not wasting time or money on those that 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. Independent advisors can keep your 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.
Ask questions
Unless specifically asked, advisors aren’t likely to volunteer that they’re 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 the advisory firm and the individual advisor compensated? Does the firm and/or advisor receive commissions or fees from parties other than me? Does the advisor receive a direct incentive for selling additional services, even if not commission based?
- What investment strategies and products will I have access to if I work with you as my 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 clearly speak independently for themselves and on behalf of their firm.
