Developing A Longer-Term Plan – The Wall Street Journal

Is working with an independent financial advisor right for you?

When you choose a professional to help manage your money, it’s easy to assume that all financial advisors belong to the same professional group and adhere to the same standards. In reality, though, “financial professionals fall into two general groups, according to whether they sell products or advice,” says Mike Delgass, CEO and managing director of Sontag Advisory, which has offices in New York, California and Florida.

 

It’s important to understand the differences between the two before you hire financial help. It’s also helpful to understand the advantages of working with an advisor whose main responsibility is to put your best interests first.

 

A tale of two types

 

The two main types of financial advisors are broker-dealers and independent Registered Investment Advisors (RIAs). Broker-dealers sell investment products, such as stocks, bonds and mutual funds, earning commissions on the products they sell, on trades and may also be compensated for meeting sales goals. RIAs provide holistic financial advice and make suggestions on how to structure investment portfolios. Delgass, whose company is an RIA, says most independent advisors like those at his firm earn their money by charging clients a flat fee for their work. They also may charge fees based on a percentage of a client’s assets versus earning income by selling specific financial products.

 

What’s in a name?

 

As for certified public accountants (CPAs), Certified Financial Planners (CFPs®), wealth managers and other pros, don’t let their job titles confuse you, says Michael Nathanson, chairman and CEO of The Colony Group, an RIA firm based in Boston and other cities. Some of these designations—such as CPA and CFP—tell you that the professional has extra training and certification. Others, like wealth manager, typically are job titles within a company. Nathanson notes that most of these professionals still fall into one of the two broader financial advisor categories: either broker-dealer or RIA.

 

Standards of care

 

Delgass likens hiring an independent advisor to hiring an attorney when you have a legal issue or a buyer’s agent when you purchase a house: RIAs work solely on your behalf. You pay their fees, and they typically don’t earn commissions on the investment products you buy. In addition, when RIAs register with the U.S. Securities and Exchange Commission (SEC) or their state, they agree to abide by the fiduciary standard. This means they’re legally bound to put clients’ interests ahead of their own, Delgass explains. Fiduciaries must also disclose any potential financial conflicts of interest to their clients.

 

“It’s a very rigorous standard because it requires independent advisors to put the client at the center of everything,” Nathanson says.

 

Broker-dealers aren’t fiduciaries. Instead, they’re held to what’s called the suitability standard—they must agree to provide advice and sell financial products that are suitable, or generally appropriate, for their clients, a less rigorous standard than fiduciary guidelines.

 

Focus on relationships

 

Because their goal is often to offer comprehensive financial advice, RIAs tend to spend a lot of time getting to know their clients and their needs. For this reason, Nathanson says many purposely limit the number of clients they manage.

 

Delgass adds that because RIAs don’t earn product commissions, they aren’t tempted to sell unnecessary products or push clients to buy or sell within their portfolio.

 

Choosing financial solutions: an open field

 

“Independent RIAs frequently use what’s called an ‘open-architecture’ investment management style,” Nathanson says. Unlike many broker-dealers, who are affiliated with a single financial company and its products—or advisors who work for banks or other large companies—independent advisors often have greater freedom to objectively pick and choose investments and other financial solutions. “This open approach helps us offer objective financial advice and choose the best financial options from multiple companies for our clients,” he says.

 

Fee transparency

 

Because independent RIAs typically charge flat fees for their advice, there’s no question about how they’re earning their income. The RIA’s fee could be either a set dollar amount or a percentage of the financial assets they manage for you.

 

Checks and balances

 

To help safeguard your funds, independent RIAs usually use third-party financial companies (“custodians”) to hold assets. “In the world we live in today, clients want to know that their assets are safe from potentially unscrupulous advisors,” Nathanson says. An outside custodian helps offer that protection.

 

Of course, being an independent RIA doesn’t automatically make that financial advisor’s work superior. “Any professional who really cares about the people on the other side of the table can do a great job,” Delgass says. “However, I do think the RIA focus on providing advice and being a fiduciary—rather than selling products—naturally leads to a deeper relationship between financial advisors and their clients.”


The named advisory firms (“Advisors”) custody some or all of their assets with Charles Schwab & Co., Inc. (“Schwab”). The Advisors are independent and not affiliated with Schwab, and their personnel are not employees or agents of Schwab. This is not a referral to, endorsement or recommendation of, or testimonial for the Advisors with respect to their investment advisory or other services. Schwab Advisor Services™ serves independent investment advisors and includes the custody, trading and support services of Charles Schwab & Co., Inc. Member SIPC. (1118-8URS)