RIAs are becoming the advisors of tomorrow

By Brian Lucius

Gradient Financial Group


According to the Spectrem Group, only 22 percent of mass affluent investors -- those with a net worth between $100,000 and $1 million -- now rely on a broker as their primary financial advisor, down from 30 percent just one year ago. And independent advisors, Spectrem noted, appear to be the most immediate beneficiaries of brokers' losses.

If you have paid attention to industry news headlines over the past year, there is no doubt you have seen one a week on the explosive growth of independent RIA firms. It all started with how quickly these firms were gathering assets and new affluent clients in a declining 2008 market. TD Ameritrade did a study over the last four months of 2008 and found that 60 percent of those RIAs surveyed had actually reported an increase in total number of clients in the last quarter of 2008. That's right; investment advisors were gathering assets at a record pace in a declining market.

"This survey shows RIA firms have solidified themselves as the model of the future in this difficult market," said Tom Bradley, president, TD AMERITRADE Institutional. "Advisors are moving full-speed ahead as the independent model gains in popularity with clients."

So why are independent RIA firms gaining so much popularity with investors? Most believe that the old days of the broker calling high net worth clients to give them the "latest stock pick" are all but dead. Consumers and investors have proved to be suspicious of the big wirehouses and brokers, as that same TD Ameritrade Study shows that half of all new assets to the surveyed RIA firms are coming from those very same brokerage firms.

Insurance agents have also suffered at the hands of RIAs. Does it mean that the clients are choosing investment vehicles over insurance alternatives? Not necessarily. What it does mean is that consumers are being educated on the difference between advisors and financial salespeople. I am not by any means implying that an insurance only agent is "nothing but a salesperson." What I am saying is that an investment advisor explaining the difference of fees versus commissions is a very compelling story.

This does not mean you can't be an insurance agent or registered representative along with being an investment advisor. Most of our successful investment advisors are also insurance agents and reps. The truth is, there is a place for all financial products, and it is up to you to decide what's best for your clients.

The real question becomes: How are you viewed by the public?

In research conducted by The Oechsli Institute, which specializes in helping financial professionals to better attract, service and develop loyal affluent clients, states:

Today's Most Trusted Financial Professional for Unbiased Advice:
  • Financial advisors, at 30 percent, are now deemed the most trusted financial professional for unbiased financial advice by the affluent.

  • Financial planners follow behind at 20 percent and CPAs at 18 percent.

  • Stockbrokers and insurance agents round out the bottom of the list.
The Oechsli Institute, 2009

Most people that would prefer to have a "financial advisor" most likely already have either an insurance agent or a rep as their financial professional. The average American is oblivious to the difference between insurance agents, reps and investment advisors. The truth is, most financial professionals are even unaware of the difference.

Some of the biggest offenders come from the wirehouses and brokerage firms. Some brokers believe that because they have a Series 7 and Series 66, they are investment advisors. This is false. Although the Series 7 and Series 66 make a person exempt from taking the Series 65 (investment advisor exam), this does not automatically make them registered. They still have to affiliate and register under an RIA firm. Another common misconception is "you can't sell stocks without a Series 7." This is again false. You can't sell stock to a client for a commission. An investment advisor can ACAT transfer the entire brokerage account over to a custodial account. From there, they can liquidate holdings, buy new holdings, or make any other adjustments they and their clients see fit.

There is a lot to learn and understand for many financial professionals when it comes to the landscape of the financial services world. In all honesty, most insurance marketing organizations, broker-dealers, and RIA firms don't understand it either. Some just see it from their biased point of view. Other firms realize the difference but choose to spin it to their advantage and to their benefit.

Often, you are stuck in the middle between an insurance marketing organization and an RIA pitching their solutions, and it's hard to find someone with your best interests in mind. The truth is, there are some great insurance marketing organizations, broker/dealers, and RIA firms that truly have the producers' best interests in mind.

My only advice is, don't settle for what you think you know. You owe it to yourself to get advice from several sources and figure out which business model is best for you and your clients. After all, this is a confusing world we live in, and I don't see it getting clearer anytime soon.

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