What Are The Different Types of Investment Advisors?
Whether you are an experienced investor or just looking to gain knowledge about the basics, you may at some point have considered seeking professional guidance. With careful planning and the right advice, investing can become a venture just as profitable as it is exciting.
Investment advisors will offer advice that is customized to your individual situation and as they typically wear multiple hats, may offer other financial planning services as well.
Because of the risk involved with investing, and regardless of whether it’s large or small, having an experienced investment advisor at your side can be highly beneficial. Together, you will create a plan that will allow you to be successful moving forward. However, before taking the step to hire an investment advisor, it is crucial to know what makes a good financial advisor. Additionally, you must also be aware of the different types of investment advisors in order to determine who will benefit you the most.
Three Types of Investment Advisors
RIA (Registered Investment Advisor)
One of the first defining traits of an RIA is that these advisors are regulated by the SEC (Securities and Exchange Commission) and have a fiduciary duty to their clients. This means that an RIA is required to provide advice that is in the client’s best interest. They also must disclose any possible conflict or risk to the client.
These advisors typically earn their revenue through an annual management fee that takes a percentage of AUM (Assets Under Management). So, as a client’s account grows, so does the advisor’s fee. Likewise, as the client wins, so does the advisor. This fulfills the fiduciary obligation of the RIA because the advisor and the client are on the same side of the table.
Because of the nature of their compensation, it is common for RIAs to primarily advise wealthier individuals or companies. Nonetheless, as the world of investment is ever-changing, so are the agent models. While traditionally RIAs have focused on the wealthy, there is a new movement that is focused on providing guidance even if the client has not accumulated assets, according to Forbes.
Commission Advisors
These advisors are typically registered with FINRA (The Financial Industry Regulatory Authority) and are not held to a fiduciary standard but rather a suitability standard. This means that while their advice must be suitable for the client, it does not necessarily have to be in their best interest. That being said, because they are regulated by an independent organization, commission advisors will generally have more freedom and flexibility in how they work and what they have to offer their clients.
Unlike RIAs, they are paid upfront and charge commissions (typically taking up to 5% off the initial investment as a commission.) After the commission is paid, these advisors do not make too many changes within their accounts.
It is also worth noting that these advisors will typically include life insurance into their pitch as well. Having an advisor skilled in multiple areas of financial planning can be valuable to your life or business plan.
Hybrid Advisors
Some larger brokerage firms are introducing a hybrid model where, as the name suggests, agents are able to do some RIA business while also using commissioned products.
Because these agents are registered with both the SEC and a broker/dealer firm, they are able to offer high flexibility to their clients and greater access to products. Hybrid advisors are ideal for people who may need the services of an RIA and commission advisor but don’t want to go through the trouble of hiring both. One note to add, the advisor could be obligated to act in your best interest, but the firm that they work for might not.
Which type of investment advisor is right for you?
With the three different types of investment advisors outlined above, you may still be wondering how to know which option is the best one for you. Ultimately, it is extremely important to identify your personal wants and needs first, as each type of advisor caters to the client in different ways. Consider these key points:
- Will the advisor be compensated through commission or through AUM?
- What are the ethical standards of the advisor?
- Are there specific products that you are looking for?
- Does the business model of the advisor offer flexibility?
- Does the advisor offer other services?
For instance, if reliability is extremely important to you and you want to know with confidence your advisor has your best interests at heart, RIAs are likely the way to go. This doesn’t mean that commission advisors won’t put their clients first, as many do, they just aren’t required to.
Having said that, if you want a wider range of services and products that you may not receive from an RIA, a commission advisor could be very useful to you. Last, if you like aspects of both RIAs and commission advisors and are looking for the utmost flexibility when it comes to working with an investment advisor, hybrids are a great option.
Hiring an investment advisor is more than just choosing someone to handle these matters because you don’t have the time or know-how. It’s trusting a person to offer you valuable advice, keep you up to date, and create a personalized plan for your finances moving forward. Doing this will allow you to stay focused on your family or business while still being an active participant in investing. So, what it really boils down to is finding an advisor that you are comfortable working with—someone who meets your standards and expectations. From there, you will have the insight of a professional to keep you on track.
If you want to begin your journey in investing with professional guidance or already know the basics and would like to continue on with an investment advisor that meets your needs, contact IronOak Wealth today.
