Say you are going to buy a car and walk into a Ford dealership with a list of features that you want in a new car. You hand the list to the Ford sales associate and ask them for a recommendation. Do you think their recommendation would be the best car for you or the best Ford for you? Wouldn’t it be nice if the sales associate pointed you to the best car for you, instead of immediately steering you to a Ford?
Likewise, you want your wealth advisor to be motivated to select the best investments available in the market, and not necessarily investments within a specific set of options, in-house products, or those that offer the highest commissions.
Do you know what your investments are costing you?
If you’re like many people, you might not feel comfortable managing your investments completely on your own. There are many experts in the financial services arena who have the skills to manage your investments. But not all asset managers are the same. How they price their services is one major area where they differ.
For the sake of this article, we’ll consider one of the major pricing differences between a broker-dealer or “broker” and a registered investment advisor (RIA).
RIA vs broker-dealer pricing
You will typically pay a broker-dealer a commission for each transaction made on your behalf. While brokers are expected to make appropriate investment recommendations for their clients, they do not have any legal requirement to do what is in your best interest.
Registered investment advisors, on the other hand, are often paid a fixed fee, usually an annual advisory fee that’s based on a percentage of the client’s assets under management. There are no commissions for registered investment advisors, thus their advice is not motivated by any self-interest. Moreover, registered investment advisory firms are registered with the SEC and are required by law to act as a fiduciary to clients. Fiduciary responsibility means the advisor has a legal obligation to act in the best interest of the client at all times.
A closer look at mutual fund fee pricing
This price difference in fees exists largely because broker-dealers and RIAs buy and sell different types of share classes when it comes to mutual funds. Although each share class of a mutual fund holds the same underlying securities, their fees are structured differently. The share classes that brokers buy and sell typically have higher expense ratios, and in some cases, also charge additional annual fees paid to intermediaries (including brokers) for marketing and distribution.
On the other hand, registered investment advisors buy and sell the lower cost “institutional” share class.
As you can see, investing with an RIA could save your portfolio up to 1.23% a year. Over time the lower fee structure of an RIA can increase portfolio returns dramatically. In this analysis, the difference in fees for one year of a hypothetical $1 million portfolio could be $12,300. Who wouldn’t want to have an extra $12,300 in their pocket?
Here’s how fiduciary duty can impact pricing
The bottom line? RIAs have their interests aligned with their clients and are legally bound to act in their clients’ best interest. An independent RIA has the ability to evaluate a wide range of investments and select the best fit for the client.
RIAs also work with clients on all aspects of wealth management, such as tax, estate, education, and retirement planning. This integrated approach is often attractive to high net worth individuals.
There are many outstanding wealth advisors out there, including many brokers. It’s important that you feel comfortable with who is managing your money. You’ll want to take into consideration their track record, education, and experience, but you will also want to consider how you will be charged for their services. Who you work with could influence how much money stays in your pocket.
In the interest of full disclosure, our firm, GGM Wealth Advisors, is a Registered Investment Advisory (RIA) firm. The idea for this article came from past conversations with clients, many of whom used to work with brokers and at the time, didn’t know that they could potentially save 1% (or more) of their total assets every year by simply moving to a registered investment advisor.
How much can you save?
