I started this journey when I met with a financial advisor at Edward Jones. As was my practice of business networking during my job hunt, meeting with her to learn secrets to her success was not unusual. She was very gracious, and we developed a great rapport. At the end of our conversation, she asked if I would consider becoming an advisor because, given my background, experience, and personality, she believed I would be good at this role. Taken aback by the ask, I politely declined and thanked her for her time.
Fast forward four years. I’ve been with large institutional firms like Edward Jones. I’ve been with independent broker-dealers like LPL, both as a corporate advisor and as a hybrid advisor. Now, I’m venturing into the world of complete independence as a Registered Investment Advisor (RIA). One can say that I have a unique lens into this world of financial advising.
More importantly, what does it mean to clients when they work with advisors from each of these categories? This article is an attempt to highlight my learnings, why I decided to go RIA, and, depending on the corporate structure under which they operate, how your advisor may be influenced in what they say and do when servicing your accounts.
Please note: I am generalizing in my observations. There may be exceptions to these generalizations.
Institutional Firms (a.k.a. Wirehouses)
I spent 20+ years in the technology sector. I knew very little about the landscape of financial advising. What I knew I learned from working with a financial advisor beginning in my 20s. My advisor was first with UBS; after about ten years, he moved to Morgan Stanley. I did not want to start a new relationship with another advisor, so I moved with my advisor.
If I had known then what I know now, I would’ve recommended myself to dump him and find a new advisor. Here’s why.
Advisors from wirehouses are incentivized to do one thing: SELL.
They are what I call “Bone Collectors.” (You can read more at my article on Bone Collectors) They are incentivized to gather assets. The more assets they collect, the more they make, and the more they make, the bigger their offices. They have monthly quotas for new assets brought in. Fancy trips and large bonuses are dangled in front of them, and they are put on performance plans and may be fired for not meeting new asset quotas.
This creates two problems. First, wirehouse advisors are not incentivized to help clients solve more complex financial issues. Once your assets are brought in, advisors have little incentive to help you tackle life events unless it triggers bringing in more assets like a 401k rollover or sell a commission-based product like annuities. Advisors who go deeper do so on their own accord. But these good guys are trapped in a broken system. At some point, even they slow and conform.
Second, wirehouse advisors figured out at some point that it’s much more scalable to focus only on wealthy clients vs. everyday Joe and Jane. As a result, many of these advisors start to impose minimum asset requirements. This alienates ordinary people who most need help from advisors. Now, there’s nothing wrong with defining a target market. But this is precisely why when you want the expertise of a financial advisor, they won’t talk to you because you don’t have enough assets to bring to the table.
Independent Broker-Dealers (IBD)
IBD advisors have more flexibility and autonomy than traditional wirehouse advisors. You see more of a variety of business models with IBD advisors. This is good as asset collections, quotas, etc, do not necessarily drive them. However, one limitation of the IBD model is compliance.
Don’t get me wrong. Compliance is a good thing. Compliance is instituted to prevent bad actors from taking advantage of unsuspecting clients. There’s a saying in the advisor world that compliance doesn’t just protect the public from bad advisors; compliance protects advisors from themselves. I’m a fan of compliance.
However, some compliance rules in the IBD world restrict advisors when working with clients. One example is IBD advisors cannot be “selling away.”
What is “selling away”?
In its strictest sense, preventing an advisor from recommending an investment that the brokerage firm hasn’t vetted is a good thing. We want brokerage firms to do their due diligence to make certain available investments are legitimate before clients invest in them. However, in practice, “selling away” could also be interpreted as moving clients’ assets at the brokerage firm to somewhere outside the brokerage firm, even though the new investment is legitimate, sound, and makes sense for the client’s specific situation. For example, selling your equity investments so you can buy real estate or moving your bond investments to buy US Bonds through www.treasurydirect.gov. If an IBD advisor makes these recommendations, even though they may be in the client’s best interest and they are legitimate investments, the advisor may violate “selling away.” As a result, IBD advisors are restricted from making recommendations that may be in the client’s best interest.
Again, I know I’m painting with a broad-stroke, and exceptional IBD advisors exist. Based on my experience, IBD advisors are limited in what they can recommend to clients in order to stay compliant. Simultaneously, clients would never know this because their advisors are not allowed to bring it up in the first place.
There is also something called Best Interest vs. Fiduciary standards that are sometimes non-complementary to each other. But this is a big hairy topic that many regulatory organizations are still trying to work out, and it would be too daunting to tackle that here. You can read more about that here, here, and here. But the TDLR of it is that wirehouse and IBD advisors abide by the Best Interest standards, and fiduciaries (such as CFP® professionals) must abide by the fiduciary standards. From the client’s perspective, these two standards could make a dramatic difference in your advisor’s recommendations.
Registered Investment Advisor (RIA)
And this leads to my reasoning for going RIA. As an RIA owner, I must register directly with either the SEC or the state, depending on the size of the firm. They have oversight jurisdiction over my firm. I can be audited any time, which is scarier and more stringent than having compliance at the wirehouse or the IBD acting as a buffer.
Being an RIA also gives me a lot more flexibility in what and how I can communicate. Whereas at wirehouse and IBDs, compliance must lower their bar to the lowest common denominator to account for bad actors, I can now produce and publish valuable and educational content without compliance scrutinizing each word or sentence. Of course, there are still words that are off limits (i.e., promises, guarantees, unicorns, magic elixir), but because I am my own lowest common denominator, this leads to more creative freedom. To that extent, you will be seeing more content from me moving forward (like this article), sharing and teaching, in the hope of making all of you smarter and wiser investors, clients of advisors, and just well-informed consumers. Content published at wirehouses and IBDs are more sanitized, institutional, clinical.
Being a true fiduciary is also a benefit that matters to clients. As a CERTIFIED FINANCIAL PLANNER® professional, I have a fiduciary responsibility to my clients. According to the CFP Board, this includes the Duty of Loyalty, Duty of Care, and Duty to Follow Client Instructions. In general, I do what is in the client’s best interest, even at the risk of my own detriment. I’m free to make recommendations, not force clients to bring new assets if it doesn’t make sense, and be creative in planning for clients’ financial situations. This enables true fiduciary standards, which results in Real Financial Planning.
Going RIA also allows my practice to be fee-only, which means not making any commissions and paid only by clients, not mutual fund companies, insurance companies, etc. Minimizing any perception of conflicts of interest is essential for any advisor. While several of my clients mentioned that they’d rather have me earn the commission than someone else from their buying a life insurance policy, for example, removing any doubt in the client advisory conversations and maintaining that level of integrity when making recommendations is essential to my brand. Only RIAs can be fee-only (non-commission). All others are fee-based (includes commissioned work).
Finally, being an RIA allows me to narrowly focus my communication to my target audience. For example, here are the foundational truth statements in how I operate.
I follow Biblical teachings in what I do.
No matter how difficult, there is always a solution.
We are stewards of what we’ve been given to manage.
When it comes to investing, time and discipline matter most.
Do good. Do right. All others will follow.
Sometimes financial planning is more art than science. Others more science than art. Yet others, only science and only art. My job is to find that right balance and adjust and guide my clients into future life phases.
Still Learning
One principle we adopted in the startup environment is the idea of RAD (Rapid Application Development). Create products quickly and fail quickly so we can move on to the next idea. We never stop learning and discovering, trying and retrying. I’m in the same mindset right now. I’m a sponge and am learning to continue refining the financial planning craft. If you have ideas or suggestions, please get in touch with me.
“Once you stop learning, you start dying.” -Albert Einstein
So here I am, an RIA independent advisor. What’s next? Who knows. But I can assure you, it won’t be boring and it’ll make me a much better advisor for my clients.