“What is an RIA? Registered investment advisors are the reason brokers are going the way of the dinosaur.”
Much like other industries being effected by technology, there is big time evolution happening in financial services that is changing the way people invest.
In the old days, working with a stock broker actually made sense. A stock broker provided two valuable services. The first was order execution; the ability to buy and sell stocks and bonds for a client. The second reason it made sense to work with a broker was information, where brokers were a valuable source of market and equity research that was simply unavailable through mass media.
But now, in the age of the PC and Internet, anyone with a computer can buy and sell a stock and information flows freely, with thousands of articles about stocks and the market hitting the wire every day. The progression of technology is causing big problems for stock brokers on its own. But when you add in sleazy mutual fund kick backs that brokers have used to stuff their pockets for years at the expense of client returns, stock-brokers are headed the way of the dinosaur.
But evolution is a beautiful thing. Because when something old and clunky dies it’s usually because a slicker, faster and cooler machine rolled into town.
Cars replaced buggies. Hard drives replaced 8-tracks. Email replaced letters. And now, registered investment advisers are replacing stock brokers.
Even though investors now have direct access to the market and massive amounts of market and equity research through the Internet, there is still huge demand for customized investment support from professional investment advisors.
But instead of going with the old broker model where brokers are paid on a “per-trade” basis and frequently getting mutual-fund kick backs at the expense of client returns, investors are flocking to registered investment advisers, or RIA’s.
There is one huge difference between a broker and a registered investment advisor that has the broker crowd on the ropes. It boils down to the way a registered investment advisors are paid. Unlike a broker who has an incentive to put clients into “kick-back” mutual funds that might not be a good fit for the client and then charges high fees to execute a trade, the registered investment advisor’s compensation is totally transparent, a percent of assets managed.That is a very important distinction because the registered investment advisor and client have the same goal; grow the account. But the brokers only goal is to execute more trades and get mutual fund kick backs, neither of which are inherently good for the client. Here is a good article providing more insight into how registered investment advisors are paid.
Beyond this key headline difference, there are other factors that have registered investment advisors crushing the broker crowd.
A registered investment advisor has a fiduciary responsibility to act in the best interest of the client. The registered investment advisor is required by law and license to maintain this high standard. But brokers are not held to the same high standard. They only have to find “suitable” investments for their clients. Here is an article discussing the lower and controversial standard for brokers. Here’s a spoiler: it’s not good for the client.
RIA’s are also independent. They don’t function under the umbrella of a huge bank or brokerage firm. That means they have a lot more flexibility to customize portfolios and tailor investment services. And they are usually smaller, which makes them more nimble and able to adjust to changes in the industry.
We already talked about superior service and transparency, but RIA’s are also cheaper than the average broker. A lot of RIA’s charge 1% of assets managed. So for a 100K account, that’s a management fee of $1,000. Considering mutual funds alone can cost up to 2%, when you add in high execution costs and hidden fees, registered investment advisors are beating brokers on pricing too.
So as you can see, the times, they are a changing in the word of investment management. Brokers are taking it on the chin, seeing huge capital and client outflows, while registered investment advisors are rallying like the 10-year on Bernanke’s birthday. So get in the game and next time someone asks you “What is an RIA,” you can tell them why you are boosting your returns and reducing your fees by using one.
Next week I am going to be talking about the greatest rip off in the history of the stock market; Mutual funds. Anyone still using mutual funds is living in a cave. 85% of actively manged mutual funds under perform their benchmarks while investors happily pay up to 2% a year in management fees alone. That is beyond insane. I am going to shred the mutual fund industry so be sure to come back an check that one out.
Your Investment Partner,