Why Hire An Independent Advisory Firm Instead of a Bank
Although there are many options available and a number of descriptors attached to firms that manage money – investment advisors, wealth managers, asset managers, portfolio advisors- as well as a broad number of designations for the advisors themselves – financial planners, brokers, portfolio advisors, Registered Investment Advisors (RIA), registered representatives and more, we hope that this article will help you make sense of the choices available to you.
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We believe the best strategy is to hire an independent advisory firm instead of a bank, for several different reasons. Here’s why:
An independent advisory firm must follow a fiduciary standard
Registered Investment Advisors (RIAs) are fiduciaries and must follow a fiduciary standard. (The designation RIA can refer to companies or to a person.) Banks are not RIAs, but are financial institutions that may employ investment advisors with many different designations. While some may follow a fiduciary standard, it’s likely that most follow a suitability standard.
The difference between fiduciary and suitability standards are important to your investments and overall financial life. The fiduciary standard is the best choice, for multiple reasons.
A fiduciary firm must put your financial interests above their own. They must always keep your best interests as the top priority, even if those interests conflict with their own. Fiduciaries must also advise you with good faith and loyalty, fully disclosing important facts about your investments. All fiduciaries are regulated by the U.S. Securities and Exchange Commission.
Firms working under the suitability standard, on the other hand, are not required to always put your financial interests above their own, nor to keep your best interests above their own. They must only make sure that any investments they recommend are suitable for your stated goals and risk tolerance. The suitability standard is regulated by the Financial Industry Regulatory Authority (FINRA).
The difference can be seen most vividly, perhaps, in looking at the commission structure. Firms with a fiduciary standard must make any trades at the lowest price possible because that is in your best financial interests. But those following a suitability standard could recommend an investment that makes a very high commission or other fees for the firm and its brokers, as long as the investment is suitable.
A bank may steer you toward a limited set of products
In addition to the higher quality of advice and standards obtainable with a fiduciary advisor, a bank may actually limit the investment options they advise you about. Why? Because banks may be financially incentivized to recommend only their own or related products.
If you’re in the market for stocks, for instance, you may be working with a Registered Representative at a bank who must work from a menu of stocks that the bank (or firms it has a relationship with) recommends.
A fiduciary, on the other hand, because of the requirement that they put your interests first, must advise you more broadly. An RIA should choose the best investments possible for your situation, period.
This issue, by the way, does not pertain only to stocks and other products in an investment or retirement portfolio. Banks may be incentivized to sell you a wide range of financial products, including annuities, insurance, mortgages, car loans and so forth. They are in the business, after all, of maximizing the sale of financial products.
You may, in fact, need these products. But you can’t be sure that you are getting the best advice possible, because the banks may be recommending them based on the positive impact to their own bottom line – not the positive impact on yours.
An independent advisory firm can give broader financial advice
A full-service financial advisor needs to take account of all aspects of your financial life. It’s virtually impossible to give adequate investment advice without knowing your overall financial picture, for example, in terms of cash flow and monthly expenses. Without that, they really don’t know how much disposable income you have available for investments or whether your investment plans are really prudent.
Any investment advisor you choose should be aware of the major categories of your financial life and your overall goals and plans. Without that awareness, they may be flying blind. In addition to your investment and retirement plans, they should be aware of any educational savings for children you plan, your tax situation and your plans for the disposition of your assets at your death. They should also give some attention to insurance, as it protects your family and your physical assets, such as a home.
RIAs and their employees are best positioned to give this broad advice. In addition to the RIA designation, it’s wise to look for a certified financial planner (CFP®) designation. CFP®s are required to have broad-based financial knowledge in all the above categories and experience.
Banks, on the other hand, may focus more on advising about their products. As a result, they may overemphasize areas in which their products play a role, such as retirement, investments or insurance, and underemphasize broader cash flow planning or taxes. They may skip entire areas if the bank has no offerings in it, such as educational savings.
An advisory firm’s fee structure is more transparent
Advisory firms in general charge a flat fee for investment advice. They may determine fees at a flat rate, per hour, or based on either services or assets under management. They cannot be paid on commission. As a matter of law & ethics, RIAs may not charge or accept commissions.
A bank may charge a fee also, but they may also charge only on commission. A fee-based structure is more transparent than a commission structure. Advisees always know in advance how much they will be paying in fees. The amount of commissions may become apparent only after trades are fully executed.
Fiduciary advisors should discuss the fee structure fully with their clients, and make sure the clients understand what the fees will be. While suitability standard advisers should discuss fees and commissions also, they may be incentivized financially to take actions that are more likely to result in commissions and to charge the highest commissions possible.
Sapiat Asset Management is the only fee-only RIA located in Greeneville, TN. We are fiduciaries, which means we put your interests first. Contact us today and let’s get you moving on the road to financial independence.
Sapiat Asset Management is a Fee-Only, Independent, Registered Investment Advisor (RIA), specializing in goal-oriented financial planning and investment management for Gen X Individuals & Families, their Businesses, & the Trusts that benefit them.