Breaking Down the Differences Between Advisory Models
In the wealth management industry, there are many variations of financial advisors, and it can often be challenging to distinguish one type from another. On the outside, most advisors may appear very similar in that they offer one overarching service, financial advice and oversight. However, when you really break it down, each advisor will likely offer such advice under one of three primary models.
Of these three models, two (for the most part) fall under something called the Suitability Standard, while the third falls under the Fiduciary Standard–and these two standards are quite different.
- The Fiduciary Standard requires that the advisor place the client’s interests first.
- The Suitability Standard states that an advisor must make recommendations based on whether they are suitable for the client.
This distinction is important to note, though it is ultimately up to the client to determine their comfort level with either standard.
As we look at the three primary individual models, there is the traditional brokerage firm, the dually-registered advisor, and the fee-only fiduciary (Registered Investment Advisor – RIA). Within each model, the individual firms are understandably unique, but their structure determines how they get paid, and how they present information to their clients.
Brokerage Firms are:
- able to charge a range of fees and commissions – many of which are related to specific products that they sell.
- bound by the Suitability Standard.
- self-regulated by the Financial Industry Regulatory Authority (FINRA)
Affiliated Advisors are:
- independent advisors who typically source their products through a brokerage firm.
- fee-based with their pricing, but with the potential for additional fees that resemble the brokerage world.
- a model that in most cases falls under the Suitability Standard.
Registered Investment Advisors are:
- typically able to charge a flat fee, or a percentage of assets under management (AUM)–some factor in both.
- paid solely by the client–not beholden to sell specific products for commissions.
- required under the Fiduciary Standard to eliminate or disclose conflicts of interest–in all cases, the interests of the client come first.
Many have argued that each model has potential pitfalls, but if you do your research, you can come armed with the tools to ask educated questions, and ensure that you and your family are in good hands. Below are a few sample questions to get you thinking:
1. Do you know if your advisor is a Fiduciary?
2. Has your advisor ever disclosed potential conflicts of interest to you, whether verbally, or in writing?
3. Do you know and understand your advisor’s professional background?
4. Does your advisor file a Form ADV?
A Form ADV is actually a two-part filing that most firms are required to submit to the Securities and Exchange Commission (SEC) on a yearly basis. In doing so, they must also provide their clients with all material updates to the document from year to year. The ADV Part 1 includes specifics on the business, the types of clients served, any affiliations of the firm, and most importantly, any disciplinary events that have involved individuals, or the firm itself. More recently, the SEC has added a Part 2 requirement, which must be written in “plain English.” This document serves as the lighter, more direct source of information for the average investor. If your advisor files an ADV, you should absolutely read it and review changes from year to year. Additionally, if you are contemplating a switch, or looking for your very first advisor, you should know that all ADVs can be found on the SEC website.
The bottom line is that most advisors are driven by the goal of making you more money and keeping you happy, but they approach this goal from different perspectives. The three models described may all contain some variation of a common fee component (typically the charge based on a percentage of AUM), but it is important to note how else your advisor may be getting paid. You may be their client, but there are incentives and standards in place that may not necessarily result in the most effective use of your assets. After all, it is your money, and you should entrust it to advisors with whom you feel comfortable working.