It starts with a phone call or an email: Your financial advisor informs you that he’s changing firms or starting his own. He explains that the reason for the change is to be able to provide truly independent advice to his clients versus recommendations tainted by the interests of his company. You have three choices. You can follow your advisor to his new firm. You can stay put and let his current firm reassign you to another advisor. Or you can find a new advisor. Here’s how to make an informed choice.
Big financial service companies, known as wirehouses, create and distribute investment products such as mutual fund families, hedge funds and annuities. Because these products produce higher profit margins than third-party options, wirehouses require their representatives to sell them. The mandate is a conflict of interest for advisors, who aren’t giving you objective advice.
Higher-quality professionals resent the pressure from management to sell proprietary products. But since they can’t change their companies’ business practices, their only alternative is to leave. Most refer to their exit strategy as going “independent,” because that word has positive connotations for clients.
Some advisors really do become independent, starting their own companies by filing with the SEC or their state securities commissioners as Registered Investment Advisory (RIA) firms. RIA registrations enable advisors to provide advice and services such as asset allocation and performance reporting. Investors benefit because RIAs are held to the highest ethical standards in the financial services industry by regulatory bodies such as FINRA and the SEC. (Wirehouse brokers are held to a lower standard called “suitability.”) RIAs charge fees, just like other professionals (CPAs, attorneys) on whom investors depend for specialized expertise. Depending on the service, the fee may be fixed, hourly or asset-based.
There is one catch. Some advisors move from wirehouses to smaller broker/ dealers. They may also describe this change as going independent, but it is not the same as the RIA alternative. The advisors cannot provide advice for fees and are not held to the higher ethical standards of the RIAs. Independent broker/dealers may not manufacture investment products, but their primary business is still selling them for commissions.
These advisors may also be shifting from being full-time employees of a firm to being independent contractors. Often they are offered hefty bonuses for jumping firms or higher payouts when they sell products for commissions. In some cases, payouts increase 60 to 80 percent when advisors go “independent.” That incentive increases their incentive to promote products that aren’t right for you.
So should you follow your advisor to his new firm? Before deciding, ask your advisor these 10 questions:
1. How many times have you changed firms in the past 10 years?
2. Are you being paid a bonus to change firms?
3. Will your old firm take legal action to restrict your ability to move clients to your new firm?
4. Will I receive the same services I’m getting now?
5. Will I pay higher, lower or the same fees at your new firm?
6. Will I incur any expense or risk to move my assets to your new firm?
7. Does your new firm, or its owner, manufacture its own investment or insurance products?
8. Does your new firm sell investment or insurance products for commissions? If so, will your commission rates at the new firm increase or decrease?
9. Does the new firm provide financial advice and services for fees?
10. Will my investment choices increase, decrease or stay the same?
Go with your advisor if you are happy with his results and believe he is a competent, ethical professional. Proceed with extreme caution if you believe the advisor’s motives are self-serving.
Jack Waymire is the founder of Paladin Research & Registry, a leading provider or information services to investors who rely on financial advisors.