With Financial Advisers, Does Size Matter?
When it comes to the professionals who help manage your money, does size matter to you? More investors are going small. Here's what you need to know about both options.
As of late, independent financial advisers have been picking the pockets of national, full-service brokerage houses like Merrill Lynch (Stock Quote: MER) and Smith Barney. These registered investment advisers—known as RIAs—are grabbing the majority of new assets from the major brokerage complexes, according to an October 2008 report from Citigroup (Stock Quote: C).
How RIAs Compare to Brokers
RIAs are usually small, 10 employees or fewer, whereas full-service brokerages may be national or international in scope, with many branch offices. Because these large branches have long been linked by special communications systems, they are also known as “wirehouses.” Historically, wirehouse brokers have been paid primarily via a combination of fee-based and commission revenue:
- They may be paid a fee assessed on their clients assets, regardless of what products are sold.
- They may be paid a commission on how much insurance or what sort of funds they are able to market.
- They may be compensated based on a combination of the two methods.
RIAs, on the other hand, are primarily fee-based, and unlike wirehouse brokers, they are fiduciaries with a stated responsibility to act in their client's best interest. Unless an RIA is dually licensed and affiliated with a broker-dealer, for instance, RIAs cannot sell products like insurance or mutual funds. Instead, they advise clients on investments, financial planning and money management, and may refer investors to product marketers as they see fit.
