Does Your Financial Advisor Have Your Best Interest at Heart?
Most people are under the impression that their financial advisor (or stock broker, or financial consultant, or my personal favorite, First Vice President, which means nothing more than that individual has generated a certain amount of revenue for his/her company), always has their best interest at heart.
As a previous employee of large financial conglomerate, I can assure you that this is often not the case, and what is even stranger, not legally required to be.
Let me repeat that.
MOST FINANCIAL ADVISORS DO NOT HAVE TO DO WHAT IS IN YOUR BEST INTEREST.
Amazing, isn’t it? Currently, a company that is registered as a broker-dealer, as most financial institutions are, has what is called a “suitability” requirement. This means that as long as a specific product is “suitable” for someone in your particular demographic, it can legally be sold to you, whether or not it is in your best interest.
In addition, broker-dealers are typically compensated through commission, which as I am sure you know creates a multitude of conflicts-of-interest when making recommendations to clients. If the best mutual fund in the world doesn’t pay that advisor a commission, what is his incentive for recommending it? I can answer that: there isn’t one.
On the other side of the broker-dealer coin is the independent business model, where most organizations, including Apple Tree Wealth Management, are set up as Registered Investment Advisors. RIA’s focus much more on holistic wealth management, rather than selling a product. RIA’s are also fiduciaries, which means they and their investment advisors are legally required to always do what is in the best interest of their clients
Registered Investment Advisors are not allowed to charge commissions for investment transactions. Instead, they charge the client a flat fee, either hourly or as a percent of the assets they manage (or both), which pays for the wealth management services they provide. This removes all conflict-of-interest with regard to investment recommendations, as no one option compensates the investment advisor more than any other.
When an RIA is set up on an open-architecture platform, as Apple Tree Wealth Management is, they are not restricted to investments from any one company, but instead are able to choose from the entire universe of available investment options when making investment recommendations. This also eliminates the conflicts that arise when an advisor can only recommend products from one company, even though they may not be the best fit for the client.
To clarify, I do not believe broker-dealers are intrinsically bad. There are certain people who simply wish to make transactions through their broker, pay a commission, and do not want to be told whether or not something is in their best interest. However, I do believe it is important to know the role of your advisor to ensure that your interests, whatever they may be, are being met.
For those who believe in comprehensive wealth management, and who believe that the approach a firm takes with its clients is as important as the investments they recommend, I encourage you to look for independent firms set up as Registered Investment Advisor’s, who will always have your best interest in mind.