Sorting through myriad choices of financial service providers can be involved. There are multiple types of providers, each with specific government regulations and particular ways of doing business.
Providers fall into three broad categories:
- Brokerage firms
- Registered investment advisors (RIAs)
In practice, hybrid arrangements between these categories add to the confusion. For example, large bank trust departments may employ brokerage firms to service smaller sized accounts, and brokerage branches are often located within bank retail offices.
Moreover, an increasing number of financial advisors, especially those seeking independence from established Wall Street brokerage firms, are “dually-registered investment advisers.” While they can charge fees as registered investment advisors, they also will earn commissions as a broker—and investors often unaware when the crossover occurs. Many investors look to bank trust companies to avoid commission conflicts, but are unaware of obtuse revenue-sharing schemes supplementing their published fee schedules—arrangements not permitted registered investment advisors without legally required client disclosure. Potential compensation conflicts are limitless.
Despite the growth of advisors adopting a fee-based model, and calling themselves things like “investment specialist” or “financial consultant” many are still acting like brokers or facilitators instead of client-focused, trusted advisors. Filling orders, following instructions, and saying what the clients want to hear—instead of what they need to hear—is what “order-takers” or “facilitators” tend to do. It can be a profitable model, but it is not truly serving the best interests of clients.
By contrast, trusted advisors are client advocates.They are not afraid to follow the courage of their convictions, to think rationally, and to maintain their discipline, even in the worst of times. We have a clearly stated and sound philosophy about investments and financial planning. We set expectations, educate our clients, and work in a collaborative fashion-always putting our clients’ interests first.
Differences between trusted advisors and facilitators:
Courage of conviction
|Carefully evaluate a client’s situation and make recommendations that are in the best interests of the client, even if the client initially disagrees or wants to do something different. Trusted advisors understand that the most prudent course of action is not always the easiest one to take. This is especially true with money and markets, where emotions can run high, often causing poor decisions to be made. It is important to take the time to explain the pros and cons of various strategies, and help a client understand which approach would be best for them.||May allow or even encourage a client to make decisions that might feel good in the short run but are counterproductive long-term. They might do this out of fear of losing business or a preference for expediency. Facilitators generally do not bring discipline and rationality to the investment process, which is a big part of the value of having an advisor. This is unfortunate because in emotional times clients can benefit from hearing a rational and independent voice of reason.|
Stated investment philosophy
|Have a clear and unwavering approach to investments and financial planning. They take the time to educate their clients about their approach and are willing to turn away prospective clients that are not a good fit. Trusted advisors have the flexibility to use any product or vehicle they feel is appropriate, but they use them in a way that is consistent with their investment beliefs. Above all, they do not adopt a approach they believe is not in the client’s interest simply because the client wants it.||Most don’t have a clearly stated investment philosophy. They want the flexibility to offer a prospective client whatever investment approach the client is looking for. Facilitators might offer several different investment solutions, even if they are philosophically inconsistent with each other. As a result, they may have clients following conflicting strategies, which makes it impossible to send a consistent message to clients.|
Coaching and education
|Act as financial coaches for their clients. A coach is an educator and teacher who understands the objectives and defines and implements a process to achieve them. He or she also communicates collaboratively in a team-building fashion, and provides the discipline to ensure good, long-term results. Education is also critical to a successful advisor-client relationship. Clients benefit from learning about economics, finance, and how markets work. A trusted advisor is able to facilitate substantive discussions about these and other important topics. Clients make smarter decisions when they have useful and informative information.||Facilitators often lack the skills needed to educate and advise their clients truly, and must fall back on other means, such as persuasive sales skills, to retain client relationships. They may not be willing to spend the time, or simply may not have the knowledge, to educate and inform their clients properly.|