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Is Your Financial Advisor on Your Side?
Sanjeev Sardana
Wednesday, September 30, 2009
From traditional brokers to independent financial advisors, where can the high net worth investors turn to for objective financial advice that meet their specific needs? The ups and downs of 2008 served a wakeup call to many wealthy investors and left them wondering just what was going on with their investment portfolios. As banks and brokerage firms reacted to the policy changes enacted by Treasury officials in Washington DC, the investors were afraid that the brokers might not even be around to manage their families’ savings. If their broker were still employed, he was likely to be facing his own challenges in the rough market conditions. He was condemned to perform the delicate act of keeping his job by balancing a revenue quota and allocating enough time to focus on analyzing and rebalancing his current clients’ portfolios.

Conflicts of interest in the money management business are plenty, and investors need to ensure that the advice from their financial advisor is as independent and objective as possible. The financial advisory space is crowded, and the landscape of Wall Street has dramatically changed within a year. Performance is one concern, but ensuring that your financial advisor’s interest is aligned with your own has become the primary concern. Some questions you may want to ask your advisor:

1. How are you Compensated?

Pay close attention to the answer, as there could be some hidden or undisclosed fees associated with the investments recommended by your broker.Often a fee is ‘built-in’ or considered part of the purchase price, and this may take the form of a ‘sales load’ (a charge passed along to the selling broker) or higher ‘expense ratio’ (consisting of various costs of the fund) in the case of buying a mutual fund. Brokers may also receive a ‘placement fee’ (a one-time commission paid to the selling broker) and ‘trailer fees’ (ongoing quarterly servicing charges) for each client they line up to invest in a particular ‘alternative’ investment, such as a hedge fund or private equity fund.

2. Is the Product being Recommended an ‘Internal’ Product?

Brokerage firms typically incentivize their brokers to push products, which will deliver the maximum revenue to the firm. These investments are considered ‘internal’ and firms have a fiduciary interest in selling them. The needs of the individual investor or the suitability of an investment may not even be considered when a particular recommendation is made.

In a sustained bull market, any particular investment may perform well; and as far as the client is concerned, the initial reason for choosing a particular investment may not even matter as long as its value increases. From the broker’s perspective, regardless of whether the investment increased or decreased in value, his commission is earned at the time of sale. Looking back at a year such as 2008, an inevitable feeling arises that the investor could have been served better with better objective advice.

The New Age of Independence

Financial advice will always be in abundance, but where can an investor turn to when it comes to managing their life-long accumulation of wealth in a way that is suitable to their own specific situation? In the past, high net worth investors have felt most comfortable having their assets held at one of Wall Street’s popular top-tier firms, dealing with a highly compensated ‘private banking’ associate in an expensive suit, feeling assured that the best and the brightest minds were providing insight into managing their portfolio.

The Landscape has Changed

Many bright individuals in the financial advisory business realized that they could better serve their clients in an independent environment, where the needs of the client come before the necessity to generate revenue for their firms; hence, the proliferation of Registered Independent Advisors over the last two decades.

There are three main categories that financial advisors fall into. First is the ‘Full-Commission Broker’, which most investors are familiar with. Most of these representatives make their living off the revenue generated from commissions on products sold, while some are able to generate revenue from fee-based payments – the latter often lead the clients to believe that they receive the benefits of a typical ‘fee-only’ advisor. These firms typically offer investment-banking services, which can be in conflict with the best interests of the investors.

The two types of advisors often associated with ‘independence’ are ‘Independent Broker-Dealers’ (IBDs) and ‘Registered Investment Advisors’ (RIAs). Independent Broker-Dealers are registered with, and regulated by, the National Association of Securities Dealers (NASD). Although some IBD’s operate fee-based businesses, their NASD securities licenses also allow them to charge commissions on securities transactions and product sales, which most take benefit of. If a broker is affiliated with an Independent Broker-Dealer, his brochure or business card might read ‘Securities offered through ………’. This may indicate a focus on securities or product sales rather than advice.

In contrast, Registered Investment Advisors are registered with the Securities and Exchange Commission (the SEC) or their state securities regulator. They are regulated by the Investment Advisors ACT of 1940, which means they have a fiduciary responsibility to act in the best interests of their clients. Fee-only investment advisors do not accept any commissions from funds they advise their clients to buy. As a result, there is usually no incentive for a fee-only investment advisor to recommend one particular fund or product over another. Their only source of revenue is a fee, which is typically based solely on assets under management. The larger a fee-only advisor grows his clients’ assets, the better he does. This arrangement exposes the investor to few, if any, conflicts of interest and directly aligns his interests with those of his clients.

When selecting an independent RIA, make sure that you do your homework. You might want to perform a background check on the advisor. RIA firms are required to make available an ‘ADV Form’, (also kept on file with the SEC), which is a comprehensive report containing financial information about the firm. Most importantly, you must ensure that they are using a highly reputable and independent custodian, as this is where your assets will be held.

Can I Benefit from the Help of an Independent Advisor?

The high net worth investors may fall into one of the following categories when it comes to their financial advisory relationship – 1) those who have grown complacent to their current broker due to a long history of working with them (“Jim has always been my broker, and he even knows all of my kids’ names!”), 2) those who believe that they could be better served elsewhere but don’t have the time or energy for the research involved, and 3) those who are actively looking for professional guidance to help manage their financial investments as opposed to leaving their financial future to chance.
Some investors may consider a financial advisory relationship when their financial affairs have become so complex that they cannot effectively manage them on their own. Triggering factors may include extraordinary income due to an asset sale, executive compensation, business liquidation, or changes in family dynamics requiring revisions to an estate plan.

The first step in the reevaluation process is to consider an objective advisor with whom you not only feel comfortable, but whom you believe will help achieve your family’s financial goals. The relationship you build with your financial advisor is one of the most important relationships you’ll ever have. You will be disclosing personal information about your family’s finances as well as your financial goals and concerns. Your advisor will help and guide you in making some of the most important financial decisions throughout your life. Ideally, the relationship will span many years and perhaps into the next generation.

Complex Investments

Some high net worth investors may fear cutting-the-cord with their private bankers due to the varied and multiple investment products they have invested in. This is where doing your homework in researching independent advisors can really pay off in the long run. While some independent RIAs might focus exclusively on providing low-cost, passive strategies of investing solely in mutual funds or exchange traded funds (ETFs), many are well versed in highly sophisticated strategies involving private equity, hedge funds, options, insurance-policy investments, and more. These independent advisors often provide advice on a client’s entire financial portfolio, and only after thorough consideration and with due diligence will they determine whether specific investments are appropriate for a client’s asset allocation.


Sometimes it can take a major shakeup in the markets to spur investors to reassess the advisor they have entrusted their financial future with. In other words, investors attempting to go it alone may realize that their goals of preservation and growth may be better served with the professional guidance of a knowledgeable advisor. Whatever the causes that led to this decision, choosing an objective, independent advisor that understands your family’s financial goals and will work hard to help you achieve them can be the soundest decision of all.

Sanjeev Sardana, President & CEO, BluePointe Capital Management LLC, San Mateo, CA
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