When evaluating financial advisors, it’s essential to understand the different incentives associated with their portfolio recommendations, as it can have a genuine impact on your bottom line. While there are dozens of terms to describe a wealth manager, the two high-level classifications that you should keep in mind are: Registered Investment Advisors (RIA) and Wirehouse Advisors (or Broker-Dealer).
Registered Investment Advisors
As discussed in an earlier blog post, RIAs and Wirehouse Advisors are held to two very different standards. RIAs are legally required to act as a fiduciary, which means they are held accountable to doing what is in the best interest of their clients, even if it does not benefit the RIA firm. Being a fiduciary mandates the highest standard of care, which means absolute transparency is a minimum requirement. For example, the omission of relevant information or failure to disclose actual or potential conflicts of interest is illegal under the fiduciary standard.
Wirehouse Advisors provide recommendations for a commission and are held to a suitability standard, which requires investment recommendations to be appropriate for the client’s risk tolerance at that point in time. This more flexible standard allows Wirehouse Advisors to propose a much larger range of services and financial products than RIAs – even when it involves a conflict of interest.
Differences in Incentives
It’s imperative to consider the differences in compensation structures between RIAs and Wirehouses because it directly impacts you.
RIAs are typically paid a percentage of assets under management (AUM) or a flat fee. This inherently incentivizes RIAs to grow the assets of their client. The RIA gets paid more as assets increase.
Wirehouse Advisors are often paid in commission fees, but some advisors also take a percentage of AUM. However, it’s misleading to think that one of their only revenue streams is commission. While this is the most guaranteed source of revenue, there are more opaque ways Wirehouse Advisors get paid that are often unknown to the client.
Keep in mind that Wirehouse Advisors work for extremely large financial firms which have a myriad of different service lines. As salaried employees for these firms, an advisor’s bonus is often contingent on how well they cross-sell the company’s services to clients. Advisors typically have a “scorecard” with different cross-selling metrics that they have to hit to get a larger bonus. Due to the suitability standard, Wirehouse Advisors are loyal to their company over their clients, i.e. they serve their company first and clients second.
What does all of this mean for you? An RIA is legally obligated to operate in the best interest of the client due to the fiduciary standard. This means an investment is only recommended to you if it benefits you. You will never wonder if a recommendation benefits other parties more than yourself -- the answer is always no. After all, the only way for an RIA to increase their revenue is to grow their clients’ portfolios.
Wirehouse Advisors, on the other hand, have access to many financial services that can make them a convenient one-stop shop. However, the incentive for Wirehouse Advisors to cross-sell can make it an exercise in frustration when trying to determine whether a recommendation is in your best interest or not.
The True North Approach
True North is a Registered Investment Advisors, meaning we always have the best interest of our clients at heart. We take a comprehensive approach on how to best serve our clients, which means we put significant effort into understanding the client’s goals, whether it’s saving for retirement or the steps to consider when selling your business . We build a personalized strategy for each and every one of our clients and work side-by-side to help them realize their goals.