Like many financial decisions, choosing a financial advisor is not one to be made lightly. The right advisor should work with you through tough decisions and help towards securing a financial future for you and your family.
One of the most important aspects to consider when choosing a financial advisor is the firm they’re affiliated with – whether they work with a boutique shop or a large, brokerage firm. More specifically, it’s important to consider differences in the volume of clients, access to the marketplace, and incentive structures that financial advisors have at the firm.
Volume of Clients
A key difference between a broker and boutique financial advisor is the number of clients they work with. Each new client an advisor takes on means they have less focus and time for existing clients. It’s common for advisors in large firms to have hundreds or even thousands of clients that they are responsible for.
The sheer number of clients for advisors at large firms leads to pre-generated cookie-cutter portfolios. There is simply not enough time to connect with individuals to create personalized financial strategies.
Smaller boutique firms, typically have fewer clients. Their value lies in creating customized financial portfolios. At True North, we limit the number of clients each advisor works with so that they can focus on building strong relationships with each individual client. This level of individualized focus leads to financial plans tailored to each client’s goals, which can be adjusted at anytime for any reason. However, not all boutique firms are created equal.
Most boutique firms have access to almost any financial asset available on the market, which means there is a tremendous number of options to consider. Market sophistication is a metric on how well a firm can navigate the market – what type of investments a firm has access to, how much knowledge they have around offerings, and how much capital they can invest. For many boutique firms that manage under $1 billion, their lower revenue typically means they are limited in the number of employees and the level of talent they can hire.
A small firm with under ten employees is limited in how much information they can absorb and analyze. Their limited capital means they don’t have the buying power to negotiate lower fees, create customized investment opportunities, or even stay up to date with technology. Alternatively, bigger boutique firms, don’t encounter the manpower problem as they have additional employees to resist that issue. True North has 31 employees, with specialized teams dedicated to investments, financial planning, compliance, and even HR. Having a larger staff at the firm keeps teams from constantly splitting their attention.
Large wirehouse firms are limited in a slightly different way. While a wirehouse financial advisor has significant buying power and reach in the market, they are limited to only working with what their firm sells. This means an advisor at J.P. Morgan can never see a Morgan Stanley or Goldman Sachs product – and they will never know if those products are better suited for their clients. For clients, they are limited in their options since their advisor can’t sell third-party products.
Financial Advisor Incentives
Perhaps the most prominent differentiator between wirehouse and boutique firm advisors lies in their incentives. We touched on incentive differences in a previous blog post. It boils down to the standards at which the financial advisor is held. At large firms, financial advisors are cogs of a much bigger machine and are held to the suitability standard. This means that they can sell any investment that can be a fit for clients, even if there’s a direct conflict with the client’s interest and the brokerage firm’s interest.
Brokerage house financial advisors are an avenue for the firm to sell the financial products. These firms incentivize their advisors to sell as much as possible by tying their bonuses with sales metrics. In addition, many brokerage firm’s financial products are catered to the “lowest common denominator,” which makes them suitable to far more people. These two factors create a scenario where financial advisors are pushed to give mass-produced investments that may not add value to a client’s portfolio.
Most boutique investment firms operate off of the fiduciary standard, which is the most strict standard of conduct for an advisor. It stipulates that advisors must always act in their client’s best interest, which means they cannot recommend an investment purely because it gives commission to the advisor. For many boutique firms, the only way to increase revenue is to grow the portfolio of a client.
How to Choose One Firm Over the Other
The advantages of a wirehouse firm are that an advisor can offer a tremendous variety of financial services, allowing the firm to serve as a one-stop shop. However, the cookie-cutter plans, lack of visibility on non-firm-specific investments, and incentive to cross-sell can make wirehouses a problematic choice for someone looking to grow their funds.
Boutique investment firms, on the other hand, typically focus on providing individualized financial plans. However, it’s crucial to choose a firm that best fits your needs. It is not a good idea to be the largest client for any firm. Try and look for boutique investment funds that manage over $1 billion because they are substantial enough to pay for the top-tier workforce, invest in tech, and have the capacity to create customized investments.
At True North, growing our clients’ portfolios is the only way to increase our revenue. We advise over $1.95 billion of our client’s assets through individualized financial plans. As a larger firm, we have specialized teams focused solely on analyzing the market or executing trades. More importantly, we are large enough to provide sophisticated, customized solutions to our clients' needs. Reach out to us to learn why many of our clients stay with us for life.