Tuesday, August 31, 2010

Registered Investment Advisors keep clients' interests at heart

By Dr. Jason White
Family Investment Center

The world of investing and managing money can be confusing, frustrating, thrilling and gratifying all at the same time. Some folks have the financial acumen to manage their own portfolios and do quite well, while many flounder in a sea of millions of investment choices and scores of different account types and other arcane rules of the road.

If you have the time, talent and dispassionate experience needed to manage your own money, then this week’s column may not be for you, and that is just fine. The United States capital markets benefit greatly from the liquidity generated by a large number of self-interested investors. But, if you have ever considered handing off the keys to your investments portfolio to a professional, or if you have done so already, then read on.

Essentially, there are two breeds of investment advisors to choose from: Commission earning brokers who charge based on the investment products they sell, and those who work on a flat fee or “commission-free” basis, Registered Investment Advisors. Given today’s increasingly complex and intertwined financial marketplace, some traditional commissioned brokers have begun offering some types of fee-based, straddling the line between both. Yet there is a very important distinction between commissioned brokers and fee-based advisors. In legalese, it is the standard of care provided.

TAKE NOTE – A Key Point Follows

Commission-free Registered Investment Advisors (RIAs) are fiduciaries for their clients. This means that an RIA is legally and ethically bound to provide client investment services that are solely in the “best interest interest of the client.” Further commission-free (a.k.a. fee-only) RIAs must be completely transparant and disclose all fees paid by clients, by research or mutual fund companies, or any others ancillary charges – including.

Commissioned brokers are held to a much lower standard of care – the investments they recommend for customers must simply meet a “suitability” standard. Whether the recommended investment is in the best interest of the client is immaterial in the world of commissioned investment salespeople.

I have been both a commissioned broker and a commission-free (fee-only) advisor in my 20-years at the virtual intersection of the streets of Main and Wall. I will remain a passionate promoter of the commission-free RIA business model until or unless a better investment business model is developed that protects clients better than an RIA, or that is more transparent.

I’m not holding my breath waiting for this to occur.

You see, a fee-only RIA earns larger fee income from a client as that client becomes more and more wealthy. Thus, it is squarely in the best interests of both the client and the commission-free advisor to be invested in such a way as to maximize growth, income and safety over time. Clients and their advisors sleep better at night knowing that they are both on the same team. This is truly one of the best win-win scenarios available in today’s financial marketplace.

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