Remember the fairy tale about Goldilocks? You know, the little blonde girl who broke into the home of an innocent family of bears, and helped herself to three meals and a nap?
Moral ambiguities aside, Goldilocks was right about one thing: ultimately, everything comes down to finding out what best fits your preferences. Not too hot, not too cold. We all are looking for something that is just right.
Believe it or not, financial advisors fit a similar pattern. Some might be too conservative, while others might be way too risky for your taste. Half of the battle is deciding what’s just right for you and your financial goals. So let’s figure out which of the three types of financial advisors best suits you—Goldilocks style.
The ‘Too Hot’ Advisor
First up on the financial advisor roll call is our ‘too hot’ money manager— the wirehouse financial advisor.
For those who aren’t familiar with the term “wirehouse,” this phrase is used to describe a full-service broker-dealer. In the modern financial ecosystem, this can range from a small regional brokerage to a massive international conglomerate. But most typically, this term is used in conjunction with many of the huge household names that most of us know about – it’s all the ‘big names’, we don’t need to call them out…you know who they are.
The origin of this title dates all the way back to when bank branches were primarily connected via private telephone and telegraph wires. This communication network allowed banks to instantly access an up-to-date record of market information, retrieving stock prices and news stories directly from their own head office.
While the term “wirehouse” is a bit antiquated, these firms still remain widespread in practice today. They are generally on the larger side, allowing them to cross-sell their clients with a portfolio of investment advice, trading services, retail banking services, mortgages, lending, and research materials under one roof. Usually, their clientele consists of people focused on buying active investment strategies—A.K.A. individuals looking for their advisor to hire third-party money managers who hang their hat trying to outperform benchmarks or employing exotic strategies rather than creating and settling into a long-term wealth plan.
The Fire Hazards
A lot of wirehouse activity falls under the “Suitability Standard.” That is, their decisions aren’t strictly dictated by the client’s best interests, which may lead them to recommend strategies that are more “mutually beneficial” for both parties. Which makes sense considering most of these advisors are able to be paid a commission, meaning they earn a percentage every time they buy or sell a specific security for their client and in some cases, their firms are able to receive a kickback on it as well.
When it comes to some asset classes, there are a variety of similar investments that may be considered “suitable” for a client, leading some wirehouse advisors to recommend the option that earns them the biggest cut.
This Suitability Standard is precisely what makes wirehouses ‘too hot’ for many investors when it comes to money management. And let’s be honest, while it’s certainly possible that a wirehouse advisor’s recommendations are in the best interest of their client, the guidelines governed by the Suitability Standard are far less stringent due to the lack of enforcement and inspection processes. And with an incentive structure that is often severely distorted, this option can potentially become financially hazardous.
In other words, be careful working with a wirehouse financial advisor— you might get burned!
The ‘Too Cold’
Up next on the list are our ‘too cold’ hybrids. This crowd tends to play hard to get, and might even give you the cold shoulder if there’s not a mutually beneficial investment being made on your behalf. By wearing both the “fiduciary” and “suitability” hats, the hybrid advisor keeps you questioning the relationship status. Are they working in your best interest? Are they being transparent and communicative? Are your incentives truly aligned?
Hybrid advisors occupy an odd position in the advisory world. As both a registered representative associated with an independent broker-dealer and an investment advisor representative of a Registered Investment Advisor (RIA), these advisors have the uncanny ability to shift between the two roles at any given moment. Keeping with the metaphor here, you were promised hot porridge but when you take a bite it’s cold cereal.
Usually, they tend to be affiliated with a corporate RIA at the broker-dealer, but in some cases, they operate as their own RIA. Additionally, they are registered stockbrokers under FINRA, which means they can technically wear two hats. Confused? You’re not alone.
Playing Hard to Get
Hybrid advisors may tell you that their “dual-registration” status provides them with increased flexibility, and while that may be true, you should ask yourself, is that flexibility really in your favor? Can they truly be trusted?
Involving someone in your financial life requires a lot of trust, and the ambiguity of the hybrid advisor’s loyalty can seem a bit…blurry. You should never assume that an investment advisor is always acting in your best interests, so be sure to press them for disclosures. Which hat are they currently wearing? What other compensation are they receiving for this advice? Is this really the best investment for me, or is it just suitable? As a client, you have a right to these answers. So ask.
The ‘Just Right’
By this point in our story, you’re probably wondering if there’s a financial advisor out there who doesn’t quite reside within the strict confines of the ‘too hot’ and ‘too cold’ extremes. Because maybe, just maybe, you’re thinking the ‘just right’ financial fit could be the one for you. That brings us to the climax of our tale and the introduction of our final character, the RIA.
They’re not too hot— offering risky, expensive investments or too cold— providing possibly conflicted advice, because they’re obligated by law to always act in your best interests. Instead, they’re just right— with most offering premium advice and wealth planning, coupled with regular check-ins so you never get lost in the shuffle.
True RIAs are distinct from our other two personas in that they are strictly fiduciaries. This means they have a fundamental, legal, and unwavering obligation to provide investment advice that always acts in their clients’ best interests, and cannot endorse investment options based on their “suitability” alone. They wear only one hat and must be honest and unbiased with every recommendation.
RIAs are also required to disclose any possible risks of conflicts of interest when it comes to these investments (whereas other advisors may conceal their other forms of compensation). If at any point a client questions the integrity of a particular transaction, the burden of proof is on the RIA who must demonstrate all risks and disclosures and ensure they were properly communicated and documented throughout the process. In other words, for investors looking for utter transparency from their advisor, RIAs are unquestionably the best choice.
Choosing The Right Fit For You
RIAs tend to be the favorite choice for many investors, but at the end of the day, it’s the firm that truly makes the difference. In comes Monument Wealth Management.
We believe every client should be provided with a bespoke, collaborative, and unique experience when it relates to wealth advice and portfolio management. That’s why we became a creative lab and brain trust and assumed our predestined position as the outspoken critics of the financial industry. It was the only way we could provide the seasoned financial expertise our clients so greatly craved, in a way that truly separated us in a sea of sameness.
We’re radically transparent, unbiased, and we don’t earn commissions or accept third-party reimbursement— in fact, we no longer even maintain the regulatory licenses to do so. Our unique Private Wealth Design process is one of the most collaborative, creative techniques in the financial industry, allowing us to work side-by-side with you in building a blueprint for generational wealth. Ready to stop getting burned? Tired of getting served cold porridge? Monument Wealth Management is here to help. And ‘just right’ on time.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument.
Please remember that if you are a Monument client, it remains your responsibility to advise Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request.
Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
Please Also Note: IF you are a Monument client, please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.