Which financial advisor is right for you?

What are the advantages of working with an RIA?

Unprecedented economic policies, major technological advances and intensifying global competition have disrupted a range of different sectors and markets. In the investment industry, however, they seem to have largely accelerated a trend that's been underway for some time. Quite simply, when it comes to which advisory relationship works best — RIA vs broker-dealer — clients are increasingly favoring the former.

In fact, we've seen an increase in RIA assets under advisement, up 340 percent since 2001, outpacing comparable brokerage industry metrics. As noted by Financial Advisor, the independent advisors' market share rose by eight percentage points from 2006 to 2016, while wirehouses — traditional full-service broker-dealers — witnessed a 10-percentage-point decline. Here's why.

High costs, low returns

There are several reasons for the shift most notably the relatively high costs of doing business at broker-dealers and the corresponding impact on investment performance. Unlike most RIAs, the brokerage industry has long rested on compensation structures that align more with the firm's interests.

Previously, most broker-dealer advisors were compensated based on the commissions their clients generated. Consequently, although many were capable of providing great advice and service, especially to clients who wanted to take a more self-directed approach to their investments, they were also incentivized to promote active and costly trading and investment products with layers of fees.

Since then, many have moved toward a model where compensation is based on a percentage of assets, but conflicts and structural shortcomings remain. These include "closed architecture" platforms, where the funds and investment vehicles available to clients are limited to those sold by the broker-dealer, and an advisor aversion to recommending opportunities that might lead to assets leaving the firm.

Beyond the next big trade

An increasingly challenging investing environment has also played a role in the migration. Faced with ultra-low interest rates, longer-term return prospects for various asset classes that appear modest, and the relative advantages of low-cost passive strategies, ultra-wealthy individuals and families have sought out wealth managers who can provide true value-for-money advisory services, including unbiased investment advice.

However, when it comes to serving the complex needs of affluent clients, they're looking for more than salesmanship. For our clients, the real value comes from working with advisors who can keep them on track and not let whatever is going on in the financial world — or their personal lives — cause them to lose sight of longer-term objectives. The fact that they also have access to frictionless and commission-free platforms from leading RIA custodians is merely icing on the cake.

While contemplating the balances of an RIA vs broker-dealer evaluation, ultra-wealthy individuals and families, in particular, are seeking the benefits of the family office model. In addition to acquiring assistance for their wealth management needs, they're also seeking support and guidance related to various aspects of their financial lives.

Taking advisory services further

We've taken this interest in a more holistic advisory relationship one step further. Some time ago, we recognized that the wealth management industry was in the midst of a secular shift, where the traditional approach to compensation-for-services was becoming an anachronism.

Under the old logic, it might have seemed reasonable that a client with $100 million in assets should pay 10 times as much as one with $10 million, but this doesn't really reflect the workload involved. Instead, when we sit down with prospective clients, we look to assess the complexity of the relationship, the number of accounts involved and their broader financial needs, and then use this information to provide flexible billing arrangements and a transparent, single fee for our services.

Passive investing 2.0

When it comes to bread-and-butter investment advice, we've also moved beyond strategies that seem designed for a different set of circumstances. In a world where returns will be subdued, taxes are poised to rise, and costs are becoming an increasingly important element of the performance equation, we've been advocating for strategies that take all of this into account.

One example includes direct indexing, where clients replicate the performance of an index mutual fund or ETF by buying the underlying securities — for little or no commission — instead of acquiring them as a bundled package. As noted in "5 Investing Tips to Get Your Wealth Plan on Track," this allows for greater flexibility in customizing exposures and enables clients to take advantage of loss-harvesting strategies that can minimize tax obligations.

When considering the best kind of advisory relationship to guide you through your investment strategies, it's important to weigh the pros and cons of an RIA vs broker-dealer. If you'd prefer to have a more hands-on approach, a broker-dealer may work best for you. However, if you're looking for an advisor who will be involved and quick to take into account the complexities of your financial and wealth management needs, an RIA firm can guide you in the right direction.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of Silicon Valley Bank, a division of First-Citizens Bank and First Citizens BancShares, Inc. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.