What is a fee-based, Financial Advisor? 

Times have changed – and so have financial advisors. Today, people don’t want financial advice from a salesman. Instead, they want a relationship with a financial advisor who is candid, trustworthy, unbiased and provides personalized investor advising for each client.

That search often leads them to a fee-based Registered Investment Advisor.  Listed below are a few points we feel make us unique from most other firms out there.

  • Fiduciary Duty
    We have fiduciary duty. The SEC describes a fiduciary like this. “A fiduciary has an affirmative obligation to put client’s interests above his or her own. As a result, a fiduciary acts in the best interests of the client, even if it means putting a client’s interest above his own. A fiduciary standard is an affirmative obligation of loyalty and care that continues through the life of the relationship between the adviser and the client, and it controls all aspects of their relationship.” The client’s best interest comes first and it is the only interest that matters.
  • We Are Not With A Broker-dealer
    Broker-dealers are not bound by fiduciary duty, instead must meet a much lower standard… suitability. The suitability standard allows brokers to pursue their own interests without disclosing those interests. Compared to fiduciary duty, suitability is a lower bar. Advisors associated with a broker-dealer are typically selling commission-based products. We do not sell products for commissions, we are fee-based.
  • Independent & Fee-Based
    As a fee-only adviser we earn no commissions. We derive income from annual management fees. The management fees are usually a percentage of the assets a client has invested. With this compensation arrangement, you know that we are just as interested in your account growing as you are.
  • Our Investment Philosophy
    There are only two investment philosophies. The first is that free markets fail, while the second is that free markets work. It is important for all people to understand what each means, choose one and align themselves with an advisor who shares the same belief. We believe that free markets work. What this means is that all the knowable and predictable information is already factored into the price of a stock. Based on supply and demand, the free market is the best determinant of market prices. In other words, it is breaking news, unknowable information, or unforeseen events that changes the price of a stock. The randomness of the market makes it impossible for any individual, entity, or software program to consistently predict market movements and capture additional returns unrelated to risk.

 

A pleasant alternative to Wall Street. A paradigm shift is happening, and the traditional brokerage houses are lagging. While old-school “stock brokers” have gone the way of the wooly mammoth, you still have a sales-first mentality in place at big banks and Wall Street brokerages. If you’re employed by one of them, the mantra is simple: make a sale, earn a commission.

As they try to serve their clients, these “wirehouse” brokers regularly contend with sales quotas and the inherent potential for conflicts of interest. It wears on them: a 2010 survey revealed that only 15% were “very satisfied” at their firms, and another 20% wanted to leave within two years.

Given the tarnished reputations of so many giant banks and brokerages, it isn’t surprising that consumers are turning elsewhere for financial advice.

Fee-based financial advisors earn no commissions at all. They derive 100% of their income from client fees – annual management fees or hourly or per-project consulting fees. With this compensation arrangement, you know that a fee-only advisor is available to help you address myriad issues in your financial life, not simply those that could lead to a commission.

A fee-based Registered Investment Advisor (RIA) usually works to manage the assets of high net worth investors. An RIA receives management fees and does not receive commissions. The management fees usually represent a percentage of the assets a client has invested.  Individuals, couples, families and institutions with sizable wealth management concerns often turn toward RIAs.

Even as the market has struggled since the end of 2007, independent Registered Investment Advisors have gained a greater share of assets under management in the U.S.

People need unbiased advice. That’s probably the #1 reason why people seek an independent Registered Investment Advisor. They know that the advice they receive is not influenced by sales incentives or directives. There is often a candor to the discussion that may not always be present at a bank or a brokerage.

This is the age of independence. When it comes to the financial future, no one wants to be “sold” – just advised. That’s why we’ve seen the rise of a new kind of financial advisor who puts the client relationship first. An independent fee-only Registered Investment Advisor.

If you meet with a financial advisor, be sure to ask a critical question. If you make an appointment with a financial advisor on behalf of yourself, your family or your company, make the following inquiry before the meeting ends:

“Are you held to a suitability standard or a fiduciary standard?”

This distinction is very important. You should be aware of the difference.

What is a suitability standard? Financial Advisors and Financial Planners are frequently asked to abide by suitability standards: when they recommend a financial product to a client, they are ethically bound to recommend a product which is “suitable” for that client.

As laid out in the manual of FINRA (the Financial Industry Regulatory Authority, formerly known as the NASD or National Association of Securities Dealers), the suitability standard has long demanded that a broker make “reasonable efforts to obtain information” on four aspects of a client’s financial life:

  • Financial status
  • Tax status
  • Investment objectives
  • Other information used or considered to be reasonable

These factors (and others) have a hand in determining whether a financial product or securities transaction is deemed “suitable” for a client.

Suitability standards emerged in response to an age-old Wall Street problem. Decades ago, stock brokers garnered all sorts of bad publicity for calling their clients up and recommending “hot” stocks or funds that were utterly inappropriate for them. The investors may have gotten burned, but the brokers got their sales commissions.

Suitability standards are good, make no mistake. The problem is that they could be even better.

Even with a suitability standard, a broker has no specified duty to act in a client’s best interest. So while that broker may recommend a “suitable” fund, stock or other financial product to you, he is not prohibited from recommending an investment that will result in a bigger commission for him or higher costs for you.

If a broker has a proprietary security that seems “suitable” for you, the broker may promote it ardently to you even though better-performing securities might be available.

In 2005, the SEC determined that “broker-dealers will not be deemed to be investment advisers” and therefore are not subject to the same fiduciary standards as Registered Investment Advisors (RIAs) when recommending investments to clients.

In 2011, FINRA Rules 2090 and 2111 expanded the existing suitability obligations while creating new ones. Any recommendations of “investment strategies” and any recommendations to hold securities within an investment strategy must now be “suitable” for the particular client, and the investor profile compiled by the broker to judge suitability must consider additional factors.

What is a fiduciary standard? This is the standard that Registered Investment Advisors must uphold. An RIA may be an individual or a financial firm. The “Registered” adjective refers to being registered with either the Securities & Exchange Commission (SEC) or a state securities agency.

RIAs have a fiduciary duty (a legal requirement) to act in the client’s best interest regardless of the level of compensation the advisor may receive as a result of recommendations or actions. Fundamentally, this comes down to two points as stated by the SEC:

The advisor must avoid conflicts of interest.
The advisor is prohibited from overreaching or taking unfair advantage of a client’s trust.
A Registered Investment Advisor is not supposed to pitch products, strategies or securities transactions with the idea that “this will be a win-win for both of us.” The client’s best interest comes first and it is the only interest that matters.

Retirement plan sponsors must also meet fiduciary standards. If you sponsor a retirement plan for your workers, then you are by definition a fiduciary. So says the Department of Labor. If you violate fiduciary standards, you may be found personally liable and responsible for restoring any losses to the plan or profits from improper use of plan assets.5

If you have hired a third-party administrator (TPA) to help you with your plan, you need to understand whether or not that TPA will assume any share of fiduciary responsibilities. Most TPAs will not.6,7

How can you tell if a TPA will? Look at the contract you sign. Look for language (in the fine print) stating that the individual or firm recognizes that it will act as a fiduciary under ERISA and the Advisers Act when offering advice to plan participants. If the TPA exercises discretion and control over the retirement plan or some aspect of it, then it could be defined as a fiduciary.

Seek strong standards. When you enter an advisory arrangement with a financial professional or financial consulting firm, the agreement you sign should tell you whether the advisor is held to a suitability standard or a fiduciary standard. In the opinion of many investors and financial professionals, a fiduciary standard clearly amounts to a higher standard.

We are a Utah, fee-based, Registered Investment Advisor firm.

If you or someone you know needs help managing retirement assets or need help setting up an investment savings plane feel free to give us a call.

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Who Am I?

Sterling C. Jack

MBA, Ph,D.

Dr. Jack founded Colwyn Investments with one purpose in mind, personalized wealth management. He has created a system that allows for conflict-free guidance with Fee-based services and relationships based on trust and honesty.

Dr. Jack has been researching individual savings behavior for 15+ years. He offers publications and presentations on individual savings, life-satisfaction, and qualitative analysis. His greatest desire is to see individuals and families meet their savings expectations, because when they do, their satisfaction with life increases exponentially.

Biography

Dr. Sterling C. Jack is an Investment Advisor based out of South Jordan, Utah. He was born and raised in Utah, and has lived there most of his life, although he has traveled extensively throughout the world, particularly England and Israel. He is the second youngest of eight children with five sisters.

He attended Bingham High School and then Ricks College in Rexburg, Idaho for one year before moving to the UK for two years of missionary service. Upon returning, he graduated from Brigham Young University in finance and obtained a Masters in Business Administration from the University of Phoenix. He completed his doctoral program from Capella University with research focused on individual savings rates and life satisfaction. In 2014, he started Colwyn Investments, an Investment Advisory Firm, offering fee-based financial planning, advisory and retirement services. Sterling and his wife Erin have six children, 2 girls and 4 boys.

When Sterling is not serving his clients, he is usually with his family, coaching soccer, watching a gymnastics meet, dance recital, football game or something his kids are involved in. His interests include running, triathlons, fishing, and historic world travel.

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