At a time when investors have grown weary of investment scandals, executive compensation excess, and the perception of ‘Wall Street’ based greed, why do you expect more people to turn to independent investment advisors?
Many investors are already turning to independent investment advisors because they are looking for advice and solutions that put their interest first. More individuals are expected to do the same as they become familiar with the advantages of working with an independent firm. The bankruptcies and failures of some very large well known financial service corporations have unnerved investors, resulting in many to wonder “Am I invested properly?” and, “Can I trust the advice that I am receiving?” While many believe they should hire a professional, they are skeptical of providers that have direct or very close ties to “Wall Street” firms. The emerging trend is that the investing public is turning to independent investment advisors because they fulfill the need for objective advice free from the potential conflicts of interests that can exist at many large firms. Consider the findings by TD Ameritrade, whose recent study “shows RIA firms have solidified themselves as the model of the future in this difficult market.”
What’s the best advice you have for people investing and planning for retirement in uncertain times?
Investor confidence in the market has undoubtedly been shaken and still the best advice for retirement planning in uncertain times is, first, to have a plan. And second, to follow the plan. While that may sound obvious, too many investors believe that the mere act of participating in an IRA, a 401(k), or a 403(b), is all that is required. Unfortunately, it is not that simple. A true plan is a written document that serves as your road map for the future. It should detail how you will invest, and spend, your money at different stages of your life. It should be flexible enough to adapt to your changes in your lifestyle, inflation, anticipated health care costs, and market fluctuations.Â
In difficult times it’s tempting to stop looking at our statements and not want to review our investments. While bull markets lend themselves to the euphoric notion that they will never end, the inevitable unwelcomed doses of reality can be extremely swift and painful. In fact, recent market events may have pushed some people off their desired track. This doesn’t mean they did something wrong; even the best sailors will tell you that sudden strong headwinds often demand a change in course. But if sailors were to stop looking at their charts simply because they had been blown off course, then they are almost certain to become lost. Therefore, it makes good sense to draft a plan that accounts for many possible paths. If you are unsure of how to create such a plan, then consider hiring a professional. Finally, it’s important to keep your plan up to date. Review it at least bi-annually and anytime you experience a major life event including a dramatic change in your goals, or in the level of your savings and income.
How does a registered investment advisor differ from other types of wealth managers?
The primary difference, and one that often matters most to investors, is the notion of the “fiduciary”. Registered investment advisers (RIAs) are regulated by the SEC and are required to act out of “fiduciary duty”. Basically put, as fiduciaries, RIAs are held to a strict obligation of putting their clients’ interests first in everything they do. RIAs typically charge clients a fee as a percentage of the assets they manage. They do not earn any commissions or other revenue from the trades that are placed in an account. If they are independent, they are not compelled to sell any specific proprietary products. Finally, RIAs usually use an outside custodian for their clients’ assets. The custodian holds the assets, providing record keeping and statements. The RIA will usually also provide quarterly statements and the duplication of records offers additional protection for clients.
In contrast, stockbrokers follow less stringent requirements and may sell any investment to a client they feel is “suitable” based on relatively little information in their overall approach to selecting securities for an account. They are regulated by the Financial Industry Regulatory Authority (FINRA), which is funded by the brokerage industry itself. Brokers may earn commissions, management fees, and asset based fees. They are not required to inform clients of all potential conflicts of interest, nor are they obligated to seek alternatives that reduce a client’s investment expense. This distinction comes as a surprise to many investors. A report by Rand Corp. last year found that 63 percent of investors think brokers are legally required to act in the best interest of the client; 70 percent believe that brokers must disclose any conflicts of interest. Advisers always have those duties, but brokers often don’t. Â
Are there any interesting trends you are seeing with clients in terms of the investment decisions they are making right now?
Individual investors have an amazing level of resilience. Those that had planned appropriately knew that they were prepared for the sort of downturn we have experienced in the last 18 months. Certainly, it is not without a level of angst and some have had to make slight alterations. However, the majority find comfort knowing that they are still on track. Our clients are mostly those in retirement or are preparing to retire relatively soon. This group is perhaps the one with the most to lose with little time to make up for any mistakes. The interesting trend has been the absence of panic (despite what the media might suggest) and the forward looking nature of their outlook. Recent conversations have with clients have included an increased level of concern which is appropriate given the volatility of the markets and the depth and breadth of this recession. Yet, every client has been able to maintain their current lifestyle while also remaining on track for their goals.
