Published on August 13th, 2012 | by Frank Armstrong
Viva La Diferencia! [Consider a Fee-Only, Independent, Registered Investment Advisor]
Fee-Only, Independent, Registered Investment Advisors are an entirely different animal than the brokerages, broker-dealers, insurance companies, and banks that have traditionally dominated the investment advice market.
The traditional commission based sales model is fatally flawed and cannot be fixed. It’s almost impossible to provide fiduciary standards of investment management if the advisor is commission based. External influence and production pressure make any recommendation suspect. The investor’s best assurance of objective advice is the ironclad separation between the advice and brokerage functions. This is why we think fee-only compensation is so important. Do you really want to pay for tainted advice?
But, there are additional compelling reasons for investors to prefer an independent approach. The Fee-Only, Independent, Registered Investment Advisor is a viable and attractive alternative for individuals, trusts, pension plans and non-profit organizations demanding high quality investment advice and portfolio management. Size and advertising budget do not translate into objective advice, tailored individual service, or integrity. There is simply no relationship between the size of the organization and its ability to provide quality services.
Investors might correctly wonder about the financial integrity of a small firm. However, that’s not an issue. We don’t have a penny of their assets – ever. Instead, they should look to the financials of the custodians that they select to hold their accounts. We provide advice and management for their accounts under a limited power of attorney that gives us the right to direct investments, but not withdraw funds. In fact, we could all disappear without a trace and their funds would be secure.
It’s important to understand that some of the important things that differentiate us from traditional Wall Street are the things that we are not:
- We have no financial ties to any of the products that we recommend
- We don’t have proprietary products
- We don’t sponsor IPOs
- We don’t custody assets
- We don’t make markets in stocks or other securities
- We don’t receive commissions, revenue sharing, 12(b)-1 fees, or other incentives from the companies we recommend
None of the above activities benefit investors. In fact they create substantial conflicts of interest that have not – to put it in the kindest possible terms – been well managed by Wall Street.
We do not want to risk our own capital in ways that endanger the financial integrity of the firm. It cannot be comforting for investors to watch the giant brokerages fail, sell themselves off at pennies on the dollar to foreign sovereign funds, or beg for bail outs from Washington. Their irresponsible, highly leveraged trading activities have jeopardized their very existence. Not only have the giant Wall Street firms proved conclusively that they are not good stewards of your money, they couldn’t even manage their own.
Small can be better
Fee-Only, Independent, Registered Investment Advisors only sell advice and management services. By being paid directly by their clients, they have no other sources of income. Fees are transparent and fully disclosed. As fiduciaries, we expect to be held to those standards, and we pledge to make all recommendations exclusively in the best interests of our clients.
We leverage the resources of America’s largest discount brokerage houses for trading and custody services. We receive no financial compensation from these companies. They provide services to you in return for nominal fully disclosed transaction fees.
Each custodian offers an almost unlimited menu of product choices for us to select from. This blank sheet, open architecture approach is a stark contrast to the restricted offerings that brokerages offer. Wall Street’s brokers may only sell proprietary products or products where the parent firm has a sales agreement. In practice, this precludes them from offering true no-load index funds or other products with limited financial benefit to the brokerage house. Their well known preference for high cost, high profit, high commission products rarely benefit their customers.
Having your assets held by an independent third party custodian provides an additional layer of protection for you. You get the best of both worlds: the financial strength of one of America’s strongest institutions, and the personal relationship with a dedicated team of professional advisors. If you are looking for an alternative to business as usual on Wall Street, you might profitably consider the services of a Fee-Only, Independent, Registered Investment Advisor.
To learn more about Frank Armstrong view his Paladin Registry profile on the Watchdog website.