It’s been almost a year and a half since I asked myself the same question that many investors have been asking themselves with increasing regularity – should I work with an RIA? Until early last year, I had spent my entire career in finance at large brokerage firms. But I had been having a gut feeling for some time that I needed a change as something just did not feel right. When I think back to the start of my career, I could not have imagined working for an upstart, fast-growing RIA like Visionary. As I sit here today, I realize that the RIA structure and my core values are a perfect match.
A Registered Investment Advisor (RIA) is an individual or firm who engages in the business of providing investment advice, making recommendations, or conducting investment analysis for clients. The main distinction that separates RIAs from brokerage firms is their legal obligation to clients. Brokerage firms are required by law to ensure any investment recommendation is suitable based on the client’s profile. RIAs have a higher legal responsibility. RIAs have a fiduciary obligation to clients such that not only must investment advice be suitable but it must also be in the client’s best interest.
This begs the question, what is the difference between an investment recommendation that is suitable versus one that is in the client’s best interest? Let’s offer a hypothetical example. A young married couple consults two advisors about investing. Each spouse is employed with group term life insurance. They have no kids, are diligent savers, and have a long time horizon. They would like an investment that offers long-term growth potential. Advisor A recommends a diversified stock portfolio. Advisor B recommends a variable universal life insurance policy. Both options offer the opportunity for long-term growth. However, Advisor B’s recommendation includes an insurance policy that doesn’t appear to be a need. Additionally, the insurance policy carries higher fees with a large upfront payment to the advisor where the diversified stock portfolio does not. In this case, Advisor A’s recommendation would likely be viewed as being in the client’s best interest. Advisor B’s recommendation would likely pass the suitability test but would not be serving the client’s best interest.
In my previous life at a brokerage firm, I was responsible for giving investment advice to advisors with regard to bond portfolios of clients. Part of my responsibility was to execute trades for advisors that met the firm’s compliance standards. Over time, I found that while the trades I executed passed the suitability test for clients, not all of the trades passed my personal test when making an investment recommendation to clients. That test was a simple grandma test – would I make this investment recommendation if it were my grandma’s account? For me, suitability was never a high enough moral bar to make a recommendation in good conscience.
I grew up in St. Louis in a middle class family with strong Christian values. My parents emphasized many important values when I was a child but none more universally important than the Golden Rule – treat others how you wish to be treated. It was this simple yet invaluable rule that served as the framework for my grandma test and would ultimately guide me in my decision to work for an RIA. In looking for potential job opportunities, I knew I wanted to work for a firm with a passion for comprehensive financial planning (not just investing), a firm with strong core values, and above all else an unrelenting commitment to always pass the grandma test – that is, to always act in the client’s best interest. I would soon realize that the legal structure of an RIA combined with the Visionary’s core values would make for an ideal match.
When you step back and think about the legal obligation that RIAs have to act in the best interest of clients, doesn’t it seem a little silly that such a law would be necessary in the first place? My wife Kelly gave birth to our first child this past April. When her doctor recommended an urgent C-section after hours of labor, did I stop and ask the doctor if she was acting in Kelly and our unborn child’s best interest? If she was putting the interest of my wife and unborn son ahead of her own interests? Of course not, the answer was obvious. So why is the investment business any different? Advising people on how to manage their finances to buy a home, pay for college, or save for retirement are some of life’s most cherished goals. It seems just as obvious for investment advisors as it does doctors that a client’s interest should always come first. Unfortunately, laws in our society are introduced for a reason. Maybe instead of asking why the legal obligation to act in the client’s best interest is necessary, we should be asking why all investment advisors are not required to follow it?
The Department of Labor (DOL) expressed the same concern with its recent creation of the DOL Fiduciary Rule. The rule requires all advisors, regardless of their status as a broker or RIA, to place their clients’ interests ahead of their own. However, this rule only pertains to retirement accounts such as IRAs and 401(k)s. While the law has shortcomings, its intention of assuring that all investment advisors act in clients’ best interest regarding their retirement accounts is a positive for investors. However, the rule falls short of the protection investors deserve as it does not include non-retirement accounts, such as savings or individual investment accounts. These accounts are still only subject to the suitability standard unless you work with a Registered Investment Advisor. An RIA was already legally bound to act in clients’ best interests prior to the DOL Rule – for both retirement and non-retirement accounts.
The robust growth in RIAs in recent years offers evidence that investors are coming to the same conclusion to the question I posed to myself prior to joining Visionary – if one desires to work with an investment firm that is obligated to put the interests of the client ahead of their own at all times, with whom should they choose to work? In retrospect, my decision to join Visionary was a remarkably easy one. Visionary’s values of faith, community, integrity, growth, and excellence, strongly align with my core values. Our legal responsibility to always put clients’ interests first illustrates to investors the transparency by which we work to help our clients accomplish their life goals. Finally, the decision to join an RIA like Visionary means my grandma test is now part of my legal obligation to the clients we serve, which suits me quite well.
John Fischer, CFA®, CFP®
Visionary Educated Investor