Considerations for Clients in Selecting an Investment Manager
Selecting an investment advisor has always been a difficult and personal task made more challenging due to a changing and confusing landscape with relationship models that sound similar, but are very different. We outline some of the key differences to provide context when selecting an advisor.
The primary consideration an investor faces is whether the Registered Investment Advisor (RIA) or brokerage model is the best suited to meet their needs. An understanding of these business models is of paramount importance.
Registered Investment Advisors
- Regulated by the SEC
- Operate as fiduciaries—must act in the best interest of the client and assume a discretionary role in the relationship
- Tasked with understanding client goals, liquidity needs and risk tolerance and implementing a portfolio suitable to meet those goals
- Do not have products to sell and are solely compensated for the advice and guidance they provide
- Best suited for the investor who is looking for expertise and hands on management beyond what they may be capable of themselves
Brokerage Firms
- Regulated by the FINRA
- Connect buyers with sellers of financial products
- Employees of brokerage firms are first and foremost beholden to the broker-dealer and are responsible for introducing products such as stocks, bonds, and managed programs to customers
- Compensated by commissions received from product sales
- Works well for clients who want to have hands-on involvement and need to access the building blocks of a portfolio
Key Questions to Consider
Amidst the myriad influences on the investment management industry, it is challenging to select an appropriate investment manager. Understanding the circumstances at play in the industry, we recommend considering some of the following questions about business structure when choosing an investment manager.
- Does the manager have scale and independence?
Scale enables high-quality resources and personnel, with professionals operating in their area of expertise. Independence ensures a culture aligned with client interests and not to other business units or operating companies.
Together, scale and independence ensure that the advisor is focused on serving the client and has the ability to do so.
- Does the manager have a breadth of investment capabilities?
In selecting an advisor, identify a partner who is able to provide various investment options; construct a suitable and purpose-driven portfolio; understand the level and location of risk in a client portfolio and ensure that interests are aligned. Technological innovation has benefited asset managers through their ability to offer more investment choices to more types of investors. An ideal manager leverages these innovations to improve the client experience.
Overall, breadth of capability allows the client to work closely with one advisor to pursue their holistic investment objectives.
- How is my advisor compensated?
Compensation models drive advisor behavior and practices, making it important to understand where your advisor’s personal financial interest lay. Is the advisor on a commission schedule or is the model fee-based and aligned with client interests? Banks and brokerage firms adhere to the commission model and may be an attractive option for the “do it yourself” investor who needs to source investment options. Investors who are seeking guidance and hands-on portfolio management tend to be better served by the fee-based model.
The lowest fee may not be the best solution—results and service are critical determinants of success. In all instances, clear and transparent fees are essential.
- Is the manager equipped to work with succession planning?
Investors should have an advisor who is well versed in potential tax management strategies and adept at coordinating with a multitude of clients’ other advisors, such as trust and estate attorneys, and accountants. The advisor must also offer a long-term path for working with successive generations.
A long-term partnership-based approach is important for enduring success.
Our Advice
- Invest time to learn, ask questions, and understand all parameters of the relationship
- Select a relationship model that is best-suited to your individual needs
- Plan on a long-term partnership, with your goals at the center
