If you have been thinking of making some better investments with your money, you’ve probably heard terms like “financial advisor” or “wealth manager” come up during your research. Yet for all the reading you’ve done, I’ll bet you’re still a little foggy on the differences between those two positions. Don’t worry, lots of people are, and there’s a good reason for it: the terms don’t actually mean much.
The average person looking for smarter ways to handle their money might come across terms like these and (understandably) think that they sound official; like something that requires certification.
I am here to tell you, they don’t.
Now, if you’re feeling shocked upon learning this, that’s perfectly understandable. After all, you take your investment and wealth management very seriously, so it only seems fair that the professionals you work with should feel the same way. Yet, in a startling number of cases, so-called financial advisors are under absolutely no legal obligation to work with your best interests in mind.
That’s the bad news – here’s the good news: There is a class of financial professionals out there full of people who are highly certified, and legally bound to work in your best interests. They’re called registered investment advisors (RIAs). Let’s dive in to find out what that means.
What is an Investment Advisor?
An Investment Advisor is the shorthand term for “Investment Advisor Representative.” These are the individuals working for RIA firms, and the people who would be in charge of managing your portfolio.
What is an RIA?
An RIA is a company or firm that is regulated by the Securities and Exchange Commission (SEC). Whereas many investment firms are linked directly with specific banks, and would therefore benefit by investing your money in ways that help that bank, RIAs are independent companies working as an entirely separate entity.
To help create a natural system of checks and balances, RIA firms rely on third party custodians (banks) to “hold” your money. While the RIA firm is directly involved with management and oversight of your money, that money is not in their hands. This distance is purposeful, as it helps to ensure that all decisions are being made carefully, and with the investor’s best financial interests at the forefront.
Who Works for RIAs?
The people who work for RIAs are Investment Advisory Representatives. These individuals have what is called a “fiduciary duty,” meaning they are legally bound to continually make decisions in the client’s best interest.
Other financial advisors are merely required to make “suitable” investments. This means that while any investment would partially benefit the customer, it would also benefit the financial advisor in the form of commission. Investment Advisory Representatives work on a fee-based (not commission-based) system, thereby removing any financial incentive for them to invest your money in a way that benefits them over you.
Why Should You Work With an Investment Advisor?
You have many choices when choosing where to invest your money, but here are some strong arguments for why you should consider an investment advisor over other options.
As stated in the intro, not every financial advisor has a duty to invest your money in the way that best benefits you. In fact, some business models are built from the ground up to benefit financial advisors, with the investor’s financial well-being as more of a secondary concern. Your money could be placed in riskier investments, or moved around too frequently in an effort to make the advisor more money.
Investment advisors have a fiduciary duty to make decisions and offer advice in such a way that your personal goals are met. They are legally bound to work for you, not for themselves.
Registrations and Certifications
Each Investment Advisor is registered with the Securities and Exchange Commission (SEC), and is a highly credentialed professional. Financial advisors who work directly for banks are often better described as “salespeople,” because their goals are to get your money into the most profitable situations for themselves.
Wide Range of Financial Planning Capabilities
Again, since Investment Advisors aren’t bound by any commissions or sales quotas, they are free to focus on a wide range of financial planning capabilities. You can find Investment Advisors who specialize in all sorts of areas such as intergenerational wealth management, small business ownership, or high net worth investors.
An Investment Advisor is capable of handling the complex investment needs of individuals by creating personalized plans that are constantly growing and updating as your circumstances change and evolve.
One of the most frustrating aspects of working with a financial planner for many investors is not knowing what they’re paying for. Why the mystery?
Some banks or individual financial advisors tend to sneak extra fees in anywhere they can. Whether these show up in the form of a “processing fee” or commissions on frequent stock trades, the end result is the same: you don’t realize how much you’re paying for financial planning. In fact, these commissions can be so obscured, some investors didn’t realize they were paying any fees at all.
By working with a transparent fee structure, investors can have a complete rundown of costs associated with their portfolio handed to them up front. Each cost can be broken down and explained, and you will know when and how frequently they are charged.
If you found this breakdown to be eye-opening, it may be because so few investors are getting the big picture. It’s true that some investing can be complicated, and require specialized oversight, but that doesn’t mean you should be kept in the dark. For a more detailed look at the investment process, download the free whitepaper The True Cost of Investing.