In my previous post, I described how the recent improvements in the investment world have provided greater opportunities for the individual investor, making it a great time to be investing. In case you missed Part I, feel free to click here and catch up. For some, the reasons discussed in Part I may allow them to handle their own planning and investments. But for most, those same reasons make an already intimidating and confusing topic even more so. Luckily, the financial planning and investment management industry has been experiencing a fundamental change that should benefit those who are not going to handle their planning and investment management on their own.
The Status Quo Is Changing–Advice Is The Name Of The Game
The current trend in the financial services industry is moving away from a sales environment towards a service environment. The days of your financial advisor calling up with a hot stock to invest in, or a new annuity to purchase are numbered. With lower costs of investing, information at the palm of our hands, and the technology to help investors do it themselves, there is little value in having someone sell you an investment; consumers are looking for more than just a product–they can do that on their own. Today, an advisor’s worth is centered around the relationship with the client. An advisor’s value extends well beyond the investments recommended–it’s the advice that is given. It’s the customized plan that is developed. It’s the skill to take complex ideas and explain them in a manner that a novice can understand. And it’s the ability to keep clients from letting their emotions overwhelm them and lead to a regrettable decision. A financial advisor’s role is to help develop a plan, keep clients accountable and on that plan, educate clients along the way, and to be the voice of reason when things get tough–be an advisor, not a salesman.
Financial advisors have taken notice to what the public is demanding, and they are changing. Advisors are transitioning away from the commission-based business model to the fee-based (mostly fee, but still some commissions), if not fee-only (only fees), business model. I don’t want to assume that everyone knows the difference between the two different business models, so let me take a minute to explain the differences. In a commission model, the advisor is compensated on a transactional basis, meaning for every trade placed, or investment sold, they earn a commission. In a fee model, the financial advisor charges an ongoing fee for the services provided. This fee could be in the form of a fee assessed on the assets being managed (referred to as AUM), a flat financial planning fee, hourly fees, or subscription fees. In a commission model, the advisor’s incentive is in finding new ideas for clients, which may not be bad. However, conflicts could arise if certain companies pay a higher commission, or have rewards for reaching certain levels of sales. In a fee model, the advisor’s incentive is tied to the client’s best interest–growing their assets, or building a solid financial plan. I’m not here to debate which model is best, that will come soon enough, but to discuss the direction of the industry’s move and the benefit to the average investor.
Registered Investment Advisors On The Rise
The Independent Registered Investment Advisor segment of the financial services industry is the fastest growing channel of the industry right now. A Registered Investment Advisor, or RIA, is a state, or SEC registered investment firm that provides advice and investment management on a fee-only basis. It is worth noting that there are some firms that are established as a hybrid-RIA, meaning that they charge a fee for the investment management portion of the relationship, but still maintain the ability to provided commissionable investments. Aside from the difference in compensation, advisors in the RIA model are held to a a fiduciary standard–this is important. As a fiduciary, the advisor must do what is best for the client…seems logical that an advisor should do what’s best for the clients. Advisors not considered a fiduciary, think broker-dealer advisors, insurance salesmen, and fixed/index annuity salesmen, are held to a lesser standard. These types of advisors are held to a standard of suitability, meaning the recommendations and investments they provide only have to be suitable, or acceptable, for their clients. Suitable doesn’t always mean best for the client. For a good article on the difference between fiduciary and non-fiduciary financial advisors read this U.S. News article.
The change in the way financial advisors are structuring their business to be more in line with their client’s best interest is a huge benefit for investors. For those investors who are not able to take advantage of the improvements discussed in Part I to better their investment experience there are more and more financial advisors aligning themselves with their best interests at heart. Combine more investment options with lower costs and more information available on these investments, with independent financial advice centered around the relationship with the client, and the investor experience just got a lot better.
What a time it is to be an investor!
Disclaimer: Nothing on this blog should be considered advice, or recommendations. If you have questions pertaining your individual situation you should consult your financial advisor. For all of the disclaimers, please see my disclaimers page.