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“I’m Here to See the Animal!”

“I’m Here to See the Animal!”

What if you went to the zoo with your family, bought a ticket, and exclaimed to anyone who might listen that you “couldn’t wait to see the animal!” People would look at you funny, and with good reason.

No matter your age, we understand that the zoo—with its lions, elephants, giraffes and countless other creatures—is all about diversity. Yet when we need help investing our money, we’re told to turn to “investment advisors,” as if they were a homogenous group. It’s as crazy as thinking that zoos are populated by a single kind of animal. Overlooking the diversity in the investment-advice business can be harmful to your wealth. “Advisors” come in every conceivable stripe; they range from those committed to serving your best interests to those that we’ll simply refer to as “less than scrupulous.” To be sure, there are able, ethical advisors and incompetent, unethical advisors in every corner of the industry; plus everything in between. But understanding the industry’s different business models can improve your odds of finding a skilled advisor who’s completely committed to your success. So let’s take a little safari through the investment advisor “zoo”:

  • Brokers: Brokers often call themselves advisors, but the truth is that they are very often investment salespeople. Yes, they dispense advice—but most make money by charging a commission each time they sell you a stock, bond or other investment. Or, perhaps, they only select solutions from a restricted assortment of choices – an assortment that they are paid to use.  Selling you more investments, or recommending investments based on the size of the commission, can enrich brokers at your expense. The best in the business resist this conflict of interest, but the fact is it’s central to their business model.
  • Private Banking and Trust Departments: Private bank clients enjoy personal attention and access to investing, banking and borrowing. But private banking can also be riddled with conflicts of interest. The biggest is the use of a bank’s in-house investment managers rather than outside firms that may be a better choice. Bank trust departments, which administer trusts and handle estate planning, are often no better. Trust officers decide how to invest the assets within a trust, and they typically face pressure to use in-house investment managers, regardless of their track record.
  • Fee-Only Planners: This model involves little or no conflict of interest. Fee-only financial planners charge by the hour, making them commission-free and usually conflict-free. And they’re legally obligated to place their clients’ interests before their own. Fee-only planners are typically not licensed to buy or sell investments on your behalf, however. They provide an investment plan, and you must buy the stocks, bonds and other investments yourself.
  • Independent RIAs: Like fee-only planners, registered investment advisors are “fiduciaries,” meaning they’re obligated to put clients interests first. They are typically paid a fixed fee or percentage of assets for providing objective investment advice; they don’t earn more by recommending any specific investment. Through their association with independent custodians, RIAs typically provide a wide range of investments. Be wary of the RIA, however, who has something to sell you that pays them more (or again) than their standard fee.

Brokers, bankers, planners and RIAs—not to mention insurance salesmen and bank-based brokers: They all call themselves “advisors.” But their business models are very different, and those differences can make a huge impact on your financial success. The smart consumer knows that there’s more than one kind of animal in the zoo.

Disclosure: The information provided is for educational purposes only and is not intended to be, and should not be construed as investment, legal or tax advice. The information is subject to change and, although based upon information that AdvicePeriod considers reliable, is not guaranteed as to its accuracy or completeness. AdvicePeriod makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information.

In accordance with Treasury Regulations Circular 230, any tax discussions contained in this communication was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein.

Past Performance Is No Guarantee Of Future Performance. Any opinions expressed by AdvicePeriod employees are current only as of the time made and are subject to change without notice. This article may include estimates, projections or other forward looking statements, however, due to numerous factors, actual events may differ substantially from those presented. While we believe this information to be reliable, AdvicePeriod bears no responsibility for the advice or information provided in this article whatsoever or for any errors or omissions. Nothing contained herein should be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. This article is not meant as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s specific investment objectives.

About Steve Lockshin

Steven D. Lockshin is the Founder of AdvicePeriod and Chairman of Convergent Wealth Advisors; author of "Get Wise to Your Advisor".
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