by Cypress Partners
October 28, 2016
by Cypress Partners
October 28, 2016
Over the last decade, investors have grown savvier, more sophisticated and more self-aware. Increasingly, they are rejecting the product-centric, obscure, sales-focused approach of brokerage firms in favor of the client-centric and transparent advice model of independent financial advisers.
Not willing to sit by and watch trillions of dollars of assets walk out their doors, the brokerage houses are masking themselves as "wealth management" firms, and stockbrokers have dressed up as "financial advisers" and "wealth managers." As a result, investors are once again left to discern whether the advice they're getting are tricks or treats and which professionals truly have their best interests in mind.
The costuming of the financial industry doesn't change the systemic problem of an investment advisory model that has always been and continues to be at cross-purposes with client interests. Even the well-intentioned stockbroker, who vehemently tries to put his clients' interests first, is beholden first to the firm because it is the source of his compensation. Commission payouts, as dictated by the firm, increase or decrease based on the amount of production (product sales) generated and the type of products sold. Conflict and bias are essentially baked into the compensation arrangement.
Contrast that with independent Registered Investment Advisers (RIAs), who by law are required to act as fiduciaries and always put their clients' interests first. In a fee-only advisory model, the RIA answers only to the client because he is compensated directly by the client. There are no commissions, no payout levels, no product incentives, no revenue-sharing or any other form of compensation. That allows the adviser to maintain an unbiased and conflict-free position in the relationship. There is no incentive for the adviser to put his interests before his clients' interests. The fee is sometimes based on a percent of assets under management, typically around 1%, or it can be a straight flat fee much like a retainer.
How to see the difference
Understanding the difference between a true financial adviser and a broker masked as a financial adviser is important, but investors still must be able to penetrate the obfuscation of slick Wall Street marketing to see the difference. Armed with this understanding of the differences and a few simple but direct questions, investors can quickly uncover who is behind the mask.
A broker will not be able to pass such scrutiny for these reasons:
Clients should expect the level of professionalism and the same clarity of duties and obligations in their financial advisers as they do in their doctors and lawyers. When seeking financial advice, they should know, unequivocally, that it is authentic and objective. Wall Street firms have succeeded in blurring the lines between authentic financial advice and incentive-based advice, leaving many investors vulnerable to the clash of interests--their own and those of the firm. While it should be the responsibility of any financial intermediary to ensure their clients are clear on the nature of their advisory relationship, clients need to be better informed as to the differences.
Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.
Craig Slayen, a new partner with Cypress Partners, contributed to this article.
Copyright 2016 The Kiplinger Washington Editors
This article was written by Cypress Partners, Ria, Founding Partner and Pete Woodring from Kiplinger and was legally licensed through the NewsCred publisher network.