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  • Writer's pictureJiayi (Kristy) Xu, MBA, CFP®

Why did I choose the Fee-Only Registered Investment Advisor (RIA) structure for my business?

Updated: Sep 16, 2022

Recently a prospective client asked me why I chose the RIA model instead of working as a financial advisor in a wealth management firm or a wealth management division of a bank. It reminded me of the time when I was considering the pros and cons of all possible options working in the wealth management industry. This blog post discusses why I selected the fee-only RIA structure for my business among many choices of structures.

The RIA structure has grown more and more popular in the past 10 years. The most important reason is that it requires a fiduciary duty to clients. You may ask, aren’t non-RIA financial advisors, such as broker-dealers, being regulated by industry laws as well? Yes, they are, but not to the same magnitude as RIAs are. For broker-dealer advisors, the compliance requirements for investment recommendations focuses on suitability. While for RIAs, the recommendations need to be in the best interest of the clients. They sound the same, but they are very different. For instance, if an RIA financial advisor recommends an investment to you, they need to find not just a suitable investment but an optimal one with the lowest cost (including both the cost of the product and the cost of implementation), because as fiduciaries, RIAs are legally obligated to put clients’ interest before their own. For non-RIA advisors, such as advisors associated with a brokerage firm, as long as the investment is suitable to you, they are not required to find the one with the lowest cost or trade in the most cost-efficient way. Also, large brokerage firms usually have their own investment products, but unlike RIAs they are not required to disclose all potential conflicts of interest and so you may never know why your non-RIA advisor picked this suitable investment instead another one.

My firm is a fee-only RIA and does not charge commission. Why do I give up commission as a source of revenue? Because I believe the fee-only RIA model is designed for long-term success and is more appropriate in today’s world. With all the self-trading platforms and robo-advisors, it is really not that difficult to buy or sell securities or set up a standard passively managed portfolio. Having a commission model charging for non-customized services that could be replaced by technology is not sustainable. Financial advisors add the most value by helping clients develop comprehensive wealth management plans (including analyzing and making recommendations on clients’ financial health, reviewing risk coverage and managing risk exposure, developing investment strategies that are specific to clients’ particular scenarios, recommending tax reduction strategies, performing retirement planning, and making recommendations for estate planning, as well as developing strategies for clients’ unique financial needs)– of course, none of those services should be commission based.

Another difference between working for an RIA and working for a large bank or brokerage firm is how financial advisors are approached by clients. Currently most clients find me either through existing networks or referrals. They got to know my personal and professional background and my specializations, and they chose to work with me after finding me to be a good fit. While working with my clients, I also get to know them at both a professional and a personal level, to the extent that I can think and plan ahead for their goals and bring their attention to financial matters that will grow to be important to them. On the other hand, clients who choose to work with big-name financial institutions usually first look at the brand name of the firm (i.e., the custodian). It is understandable that clients want to keep their financial assets in a large institution (which is why my firm uses Charles Schwab as the custodian), but selecting from a limited pool of advisors based on the brand name of the custodian takes away clients’ opportunity to find advisors who have the backgrounds, specializations, client profiles, and communication patterns that are the best fit for them. After all, the financial advice clients receive comes from the advisor rather than the custodian that holds their assets. At the same time, the sales culture of some large financial institutions encourages their financial advisor employees to take on as many high-net-worth clients as possible, leaving the advisors little time and capacity to actually monitor and manage their clients’ accounts. I personally have seen the aftermath of someone who had a multimillion-dollar account managed by an advisor employed by a large financial institution and a few of her holdings plummeted more than 50% but her former advisor did not even realize it until the client found out herself and gave the advisor a call. Operating my firm as an RIA, I am able to take on clients at a reasonable pace that allows me to dedicate enough time for each of my clients’ accounts.

In conclusion, I chose the fee-only RIA structure because my work ethic resonates with the principles of the structure - I want to build a long-term trusting relationship with my clients and grow my business by helping my clients grow their assets.

If you would like to learn more about RIAs and/or the wealth management industry but are new to my firm, let’s set up a free introductory call!


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