Choosing the Right Investment Advisor

Choosing an advisor to manage your wealth is an extremely important decision; one that can have profound effects on your accumulation of wealth as well as your overall financial well-being and peace of mind. Understanding the difference between a Registered Investment Advisor (RIA) and a Broker is paramount to making the right decision.

When thinking about hiring a particular firm or company to handle your investments and your financial planning needs, what are some of the traits that you would want in that company? In all likelihood, you would want to work with someone who had your best interests in mind. You would also want someone that truly understands you, and gives you unbiased advice based on your stated objectives. You would want to know and understand exactly what you are paying for. Well, all of these qualities can often be found in a registered investment advisory firm.

A registered investment advisor is a professional advisory firm that offers personalized financial advice to its clients, many of whom are high-net-worth individuals. RIAs typically:

  • Work with complex investment portfolios and address unique needs that require a highly customized level of investment management strategy and consultation.
  • Are owned by one or more of the individual advisors who run them.
  • Provide advice and services for a fee based on a percentage of the client’s assets.

RIAs always:

  • Have a fiduciary duty to act in the best interest of their clients.

Highlighting the differences between independent advisors and brokers will help to further illuminate the main factors that separate the two business models.

Fiduciary vs. Suitability
As a Registered Investment Advisor under the Securities Act of 1940, Wolf Group Capital Advisors is required to act as a fiduciary. That is, to always put our clients’ interests above our own and to declare any potential conflicts of interest that may arise. We deliver a true partnership based on complete impartiality, true independence and dedication to your needs.

A broker, or Registered Representative, is required only to recommend investments that are “suitable” for you. In other words, a broker can legally put his own interest above yours when recommending investments deemed “suitable” for the situation.

Advice vs. Transactions
RIAs compensation is straightforward and usually consists of an advisory fee based on a percentage of assets under their care. RIAs have no incentive to sell any product or to conduct trading in client accounts. Being that brokers are paid commissions on products sold, an inherent conflict of interest arises in that subtle pressure is applied to conduct transactions. Further, often times brokerage firms are investment product manufacturers that see their employees as a perfect distribution channel for their products.

Transparency vs. Disclosure
Brokers are required to follow the rules for legal disclosures. “Disclosures” typically consist of emails or letters being delivered that include small print and hard-to-read formal language that most individuals consider junk mail. RIAs normally fully share details on how they are compensated, any aspects of service offerings and any relationships with investment product providers. Commissions and other fees such as marketing incentives do not typically exist in the RIA space.

3rd party custody vs. in-house custody
Using 3rd party custodians is a strong safeguard in place for clients of RIAs. For example, clients of Wolf Group Capital Advisors have either TD Ameritrade or Schwab Institutional as their custodians. Because of these built in protective measures, we have limited power over the funds held at these firms.

On the flip side, not using a 3rd party custodian means these protective measures are not in place and can allow for an environment where the assets under management can be manipulated by those in charge—think of the highly publicized Bernie Madoff Ponzi scheme. Essentially, the loose standards and practices enabled the perpetrators to commit fraud.

A 3rd party custodian allows clients to double check account information provided by the RIA against statements provided by custodians. This is an invaluable safeguard which provides a substantial check-and-balance.

Uncompromising Ethics
Ultimately, fraudulent behavior cannot be legislated out of society. That said, at Wolf Group Capital Advisors we believe the best way to earn your trust and respect is through extremely transparent practices that provide our clients with prudent advice and open communication. We take our fiduciary duty to our clients very seriously and always want to be on the same side of the table as our clients. We help our clients manage their finances through a combination of thoughtful financial planning and disciplined ethics; we will never compromise any of the above core values.

Lastly, if you don’t believe us, let me reference a few paragraphs from the book The Snowball, which is a biography on Warren Buffett. You may or may not know that Mr. Buffett was a stock broker in the beginning parts of his career. Warren started to think of himself as being like “a prescriptionist.” I had to explain to people who didn’t know enough about whether they should take aspirin or Anacin. And people would do anything the “guy in the white coat” –the stockbrocker—told them to do. The stockbroker got paid based on turnover instead of advice. In other words, as Buffett puts it: “He’s getting paid based on how many pills he sells. He gets paid more for some pills than other. You wouldn’t go to a doctor whose pay was totally contingent on how many pills you took. I don’t want to be on the other side of the table from the customer. I never was selling anything I didn’t believe in myself or own myself. On the other hand, there was a markup that was undisclosed. If anybody asked me about it, I told them. But I don’t like anything like that. I want to be on the same side of the table with the people who are my partners, everybody knowing what’s going on. And a promoter, by his nature, doesn’t do that.”

We couldn’t agree more.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE WOLF GROUP TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.