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What is the value proposition of a financial advisor -- and how is a budding RIA culture upping the ante?

It goes to people's relationship with money

Friday, October 28, 2011 – 2:56 PM by Brooke Southall
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Brooke Southall: The RIA's ultimate value proposition is your belief that it is your destiny as one to help clients realize theirs.

Brooke’s Note: When I wrote the article: What exactly is an RIA? I got a lot of people answering the question by describing the value of one. That led me to write about it — perhaps a tougher task. I didn’t have a stock response to start with and when I solicited readers for their thoughts, I got virtually ( except from Steve Winks, thanks) no response. That left me digging deeper. I hope this article elicits response that adds to and hones my message.

Most people love money, but many of us detest dealing with it.

Part of it is a phobia of all things quantitative. Part of it is confronting the fact that our financial worth, in the end, all boils down to a number. That number either looks low and humiliating or high and embarrassing in that it causes a divide with people who have less.

Then there’s the fear and angst of knowing that with a wrong click of the mouse we can erase years or generations worth of accumulated value. The other side of that coin is the fear that next week, next year or next generation, our families won’t be as well- provided-for as they might have been if we had just followed the simplest investing program designed to capture a rising tide of investments.

Then there’s the more general malaise of having the soul-deadening task of managing these matters.

Yes, our soul and destiny are very much in the balance here. The American Dream — and who can resist it — is defined in materialistic terms of houses, picket fences, kids going to college and, for some of us, a houseboat in Sausalito.

Not achieving these goals is survivable, maybe. Not achieving these goals and having nobody with which to share the burden is much more unfathomable.

The truth about RIAs and stockbrokers

This is why the financial advisor’s potential value is immeasurable. It is the professional who can make sure you never live out of your car and who can deliver you to your destiny. And if it all goes wrong, there is somebody to blame. It’s big.

Judging by the amount of money that people are willing to pay in fees and/or commissions for financial advice — or even for transactions that imply incidental advice — financial advisors of all stripes provide tremendous value to clients.

Yes, I understand that there are significant differences between what stockbrokers and RIAs do for their clients.

But clients of both constituencies are willing to pay handsome sums of money, year after year, for an advisor’s services. You could argue that people are generally naive about financial matters and that some of these fees are ill-gotten. I am too much of a believer in the free- enterprise system and in people’s intelligence to credit that this could be true beyond a point.

Stockbrokers, never mind you fee-only advisors, would not have been able to continue to charge the nation’s most sophisticated investors billions upon billions of dollars in fees — mostly amicably — for decades and decades if there wasn’t some sort of big value perceived in what you do.

If you’re a financial advisor with a client with $2 million of assets under management, it would be typical for them to be paying your firm $15,000 to $20,000 a year. For many of these clients, that’s more than they pay their lawyer, their accountant and their doctor combined in that same time period.

The truth is that for many people the all-in costs go even deeper than that. Bad advice and hidden product fees can drive the overall cost of receiving financial advice much higher.

Weighing the intangibles

For the most part, consumers — at least as measured by their use of advisors — perceive that the costs of dealing with a financial advisor are outweighed by the benefits. They typically don’t fire an advisor for charging too much or even for losing money at a rate more staggering than market averages.

But they might well fire the advisor for not being willing to communicate about the losses that took place. They might also fire an advisor who performed well but didn’t communicate.

This tells me that you provide value simply by stepping into the breach as a living, breathing advocate who can serve as a guide through the bewildering maze of matters financial, technical and emotional. And that you can be present at the other end of a phone call that you place.

You offer, hope, succor, shock-absorbing skills, access to investments and the ability to pull the trigger on a trade — just, as Woody Allen once said — by the irreplaceable act of simply showing up.

Promise made manifest

What I’m getting to is that RIAs possess the knowledge, skills, values and incentives to make manifest the promise inherent in the proper management of people’s wealth.

But first let’s look at the prosaic terms Wikipedia uses to describe the purpose of your profession:

The main purpose of a financial advisor is to assist clients in the planning and arrangement of their financial affairs, such as savings, retirement provisions, tax treatment and wills. ... Financial advisors may help their clients invest for both long- and short- term goals. It is the financial advisor’s duty to determine the clients’ goals and risk tolerance and then to recommend appropriate investments.

A higher authority

A purpose and a value are not quite the same thing but they are close cousins. If somebody fulfills his or her purpose then presumably he or she also has delivered the expected value. But this explanation of a financial advisor’s value seems to be lacking a certain something.

In a recent Fidelity Millionaire Outlook survey, respondents without advisors cited the perceived benefit of financial advisors as:

1. Better investment performance
2. Wealth protection
3. Prevent big mistakes
4. Save time
5. Access to investment opportunities
6. Help achieve financial independence
7. Peace of mind
8. Opportunity to discuss investing ideas

What value does an RIA provide above and beyond the generic financial advisory firm if it is hitting on all cylinders? The big difference, of course, is that an RIA must act in clients’ best interests and be held accountable to a higher degree for its decisions.

How is this important?

This accountability factor presumably makes it more likely that an advisory firm will take the necessary steps to help its clients reap the benefits that they desire.

Advisors are likely to protect wealth, invest more prudently, provide access to a wider selection of investments and go out of their way to prevent big mistakes. In the course of pursuing such objectives in an atmosphere of accountability, the advisor is likely to give a client peace of mind and lead him or her in the direction of financial independence.

Being an RIA also makes it possible for an advisor to keep discretion of assets and charge fees. These factors lead to time savings because the advisor doesn’t need to confer as frequently with clients. The charging of fees also takes away any unnatural pressures to make investing choices based on how the advisor is compensated.

Culture wars

It’s tempting to say: And there you have it; the value proposition of an RIA is to fulfill the purpose of a good financial advisor in an ethical and competent manner comparable with professionals in the more universally respected fields of law, medicine and accounting.

But I’ll say one more thing. Breakaway advisors are always citing the Wall Street, or wirehouse, culture as a main reason for their defection. Of course nobody has ever defined “Wall Street culture” any more than they have nailed down the value proposition of an RIA. But the truth is that most people know it when they see it.

How advisors act under the umbrellas of Merrill Lynch, UBS and Morgan Stanley Smith Barney runs the gamut from the exemplary to the execrable. But even as we agree that an advisor’s probity is not to be confused with that of his or her firm, we can also agree that no one has ever used the phrase “wirehouse culture” in a complimentary fashion. And most would say it wouldn’t be too much of a stretch to say that wirehouse culture is first and foremost about hitting sales goals in the name of making the firm and the advisor prosper.

Cultures are powerful. Companies and countries have them. In general, we expect better service at McDonald’s than Burger King and friendlier folks in Dublin than in New York.

The ultimate value proposition

And here, ultimately, is my point: I believe that RIAs have a superior culture in which clients can achieve their goals in an atmosphere of human caring.

The RIA’s ultimate value proposition, therefore, is your belief that it is your destiny as one to help clients realize theirs.

Brooke’s final note: If you have thoughts about how to describe and condense the value proposition of an RIA, I’d like to hear it. Leave a comment or email me at Brooke@RIABiz. The last bunch of comments produced this article: See: How RIAs describe exactly what they do in a few choice words.



September 12, 2018 — 10:08 AM
Thanks for sharing your information with us. Nowadays a financial advisor is necessary for any SMEs and large businesses. A financial advisor can help us in taking the right decisions for our business.
David Bromelkamp

David Bromelkamp

November 5, 2011 — 4:34 PM

Brooke, You not only have figured out the key differentiator between investment brokers and investment advisors, but you have been able to crystalize what the RIA is thinking (and reduce these thoughts into words) as they establish and build their practices. You clearly have your finger on the pulse of the investment profession as we evolve into a World that will be demanding more consumer-centric investment advice. Keep on task. There is more work to be done as the investor learns about the new sources of objective investment advice that are available to them.

Brooke Southall

Brooke Southall

November 5, 2011 — 9:46 PM

David, Thank you. Right now I’m working on a piece about what things could slow or stop the great momentum of the RIA movement. It’s difficult to write because what’s most beneficial— or appears to be —- can also be the most dangerous. Thoughts are more than welcome.




January 2, 2019 — 12:44 PM
Nice thoughts.


January 2, 2019 — 12:46 PM
I agree with many of your points. I am also working with one of the financial services provider <a href="http://www.llwmg.com/oswego-wealth-management-financial-advisor.html" rel="nofollow">http://www.llwmg.com/oswego-wealth-management-financial-advisor.html</a>

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