Many Types of Financial Advisors
There are close to a million people in the U.S. alone referring to themselves as Financial Advisors or Financial Planners. Within this group exist some who have no formal training or license to be a financial advisor or planner. They simply call themselves one. Some don’t even have a college degree.
A step up from the unlicensed and uneducated are those who have passed at least one securities exam and are officially called “Registered Representatives”, but are often called “Financial Advisors” by their employers. Some may not have a college degree. Many are very young and have little life or professional experience. Many, employed by banks and large brokerage firms, are unable to offer independent and unbiased advice, in spite of their claims otherwise. We discuss the risks and disadvantages of working with large brokerage firms elsewhere.
Included within this group of nearly 1,000,000 advisors and planners nationwide is an elite group of approximately 11,000 who carry the designation, Registered Investment Advisor (RIA), or more precisely, a Registered Investment Advisory Firm.
An RIA has been through the most stringent certification process available in the industry. They have invested significant time and financial resources to obtain this designation. As such, you are immediately assured that they are likely to possess a level of intelligence, dedication and professional experience far in excess of their peers. They represent the top 1% in their field.
RIAs are Held to a Higher Standard
An RIA is required by law to act as a fiduciary on behalf of their client, meaning that they must always put the client’s needs ahead of their own, and are regulated to ensure that they do so. As such, and unlike registered representatives and other non-RIA advisors and planners, they are unable to charge commissions on investment transactions.
Further, many RIAs own their own advisory firm, making them truly independent of the type of influence that banks and brokerage firms are known to exert over their in-house advisors and brokers. As business owners, they are better positioned to understand the needs of any clients who might also be business owners.
How is an RIA Compensated?
RIA’s will usually charge an hourly fee, a fixed fee, or a percentage of client assets under management. In each case, decisions are unbiased. Fixed fees and hourly fees are usually charged for shorter projects, such as for creating a comprehensive financial plan or revising an existing financial plan.
When fees for investment management services are charged as a percentage of assets under management, the advisor and client share the same goal,—to grow the value of the portfolio.
Independent RIAs Have Excellent Professional Networks
Independent RIAs generally have built up an excellent professional network. They have affiliations with individuals and firms that assist with accounting, tax planning, estate planning and other services beneficial to their clients.
RIAs Use Institutional Custodians
RIAs typically use institutional custodians, generally large and reputable brokerage firms, to hold and safeguard their clients’ investment assets. These custodians also provide important services such as executing trades and preparing monthly brokerage statements for clients. An RIA remains independent of the custodian brokerage firm and their independence is key to offering investment advice based on what’s best for their clients and not for the firm or themselves.