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How a Financial Advisor's Business Model Affects the Advice They Provide

Financial advisors vary widely in the business models in which they operate and in the standards of care that they owe to clients.  In a prior issue of Articles on Wealth Management Topics entitled Consumers of Financial Advice Beware: Not All CFP® Practitioners Are Created Equal, I argued that these factors determine the quality of advice provided, and of products recommended, by any given financial advisor as much as his/her education, experience, and professional designations.

The results of a recent industry survey shed light on this dynamic.  A wide variety of financial advisors were questioned about the products they recommend for client portfolios.  Answers were then aggregated according to whether the advisor worked:

  • at a "wirehouse" like Morgan Stanley, Merrill Lynch, Wells Fargo or UBS,
  • at an independent broker-dealer like Edward Jones, LPL Financial, or Raymond James, or
  • at a registered investment advisory (RIA) firm like Five Seasons Financial Planning.

The findings according to Wealth Management magazine?

"... registered investment advisors [who owe their clients an unequivocal fiduciary obligation] are allocating client assets differently from those [who don't] at the wirehouses or independent broker/dealers."

More specifically, the survey of financial advisors revealed that:

1. Client portfolios created at RIA firms tend to be more diversified, with allocations spread out among asset classes.

2. Advisors affiliated with wirehouses or with broker-dealers are much more inclined to recommend expensive and illiquid variable annuities and universal life insurance products for investment purposes.

3. RIA's are more likely to use low-cost and tax-efficient passively-managed index funds and ETF's.

4. When choosing an actively-managed mutual fund, advisors at RIA firms consider the fund's expense ratio to be the most important consideration, whereas advisors affiliated with brokers and wirehouses tend to consider factors less predictive of future performance like past returns, the reputation of the fund firm, and the tenure of the fund's managers.

The inescapable conclusion is that whether your financial advisor is commission-based, fee-based, or Fee-Only, and whether or not he/she has an unambiguous fiduciary obligation to you, are more than questions of semantics. These differentiators will have real repercussions on the quality of financial advice you receive.

About the Author

Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.

Contact Paul