Bobby Moyer, CFA, CFP®, CAIAChief Investment Officer
When it comes to deciding who will help you manage your investments and retirement savings, you have two main options: a big bank (or wirehouse) or a registered investment advisor (RIA). How can you make the best decision for you? By definition, Investopedia describes a wirehouse as owing its “origins to the fact that, prior to the advent of wireless communications, brokerage firms were connected to their branches primarily through telephone and telegraph wires.” This form of communication gave insights to market information similar to information that head offices give today. This allowed brokers to share market news and stock quotes with their clients.
Today, that definition has evolved to encompass full-service small, regional brokerages to multinational, giant institutions that offer a larger range of services. These services to clients include investment banking and research to trading and wealth management.
Four of the largest and most well-known and full-service wirehouse brokerage firms in the United States include: Morgan Stanley Smith Barney, Bank of America’s Merrill Lynch, UBS and Wells Fargo.
The first step is to block out factors that really don’t matter, like advertising. The big banks tend to spend lots and lots of money on advertising to try to gain new clients. However, neither the number of television commercials aired nor the amount of money spent on advertising is an indication on how well a big bank will perform in helping you manage your investments.
Recent Trends in RIA vs. Wirehouses
In recent years, there has been a trend of many individuals moving away from wirehouses in order to work with RIAs.
According to Aite Group, a research firm based in Boston, the independent RIA channel is the only channel in the industry to grow market share since the financial crisis.
Sales vs. Service Culture
As you compare wirehouses and RIAs, one of the first things you’ll notice is the strong sales culture that exists in the wirehouse environment. Sales are usually heavily emphasized at big banks because their stock price is dependent on growing sales and revenue. One example of this sales culture is the scandal that erupted at Wells Fargo in 2016, when it was revealed that some of the bank’s salespeople used dishonest tactics to try to boost their sales numbers.
Conversely, RIAs usually have more of a family office or boutique culture. Sure, RIAs have sales goals, but they are generally more focused on assisting in client relationships than they are on hitting sales numbers. At most RIAs, there is a team of professionals that is devoted to helping clients meet their investing and retirement planning goals, while there is sometimes a limited number of people assisting in client relationships at big banks.
Fiduciary vs. Suitability Standard
A possible main distinction between wirehouses and RIAs can be the application of the fiduciary standard. As a fiduciary, an RIA has a legal obligation to make investment recommendations that are in your best interest. This eliminates conflicts of interest that might arise due to an advisor suggesting investments that increase his or her compensation.
Conversely, wirehouses are not always held to the fiduciary standard. Instead, they may be held to suitability standards that are less stringent than the fiduciary standard in terms of the advisor’s obligation to make recommendations that are in your best interest. According to the suitability standard, an advisor’s advice must be “suitable” for your needs at that particular time, but not necessarily in your best interest.
This can lead to conflicts of interest in which a wirehouse makes investment recommendations that aren’t necessarily in your best interest but result in more compensation for the advisor. As an investor you should know which standard your broker or advisor is held to.
Clearing Up Misconceptions
There are also a few misconceptions you should be aware of as you compare wirehouses and RIAs. One of the biggest is that big banks are often perceived as having more resources than RIAs. Often times, this isn’t true — most RIAs have access to the same resources that wirehouses do while providing a greater degree of personalized services with potentially more flexibility due to their open architecture ideology.
RIA firms often times choose to handle their research and due diligence efforts internally because of the expertise that they employ, whereas advisors associated with a big bank may depend on the “home” office for investment direction. By outsourcing this important component the advisor may be unaware of any potential conflicts or relationships that may drive the home office investment team’s decision making. They also may be persuaded to use propriety investment products which may or may not be the best available option.
It is sometimes harder for big banks to go “outside the box” in their investment advice because they don’t want their advisors working on things that are too complex and making mistakes.
The potential for lack of service and outsourcing of investment research is a common denominator for wirehouses. Individual advisors, and even some teams that are associated with wirehouses, are similar to “silos.” They are affiliated, but are independent to some degree. The reason that many clients choose to work within this arrangement is due to their affiliation with a well-known firm. In many cases, these “silos” operate and function independently but with restrictions. Wirehouses may have thousands of employees; however, the individuals associated with a single account may only be one or two.
Similarly, on the investment side, looking to the home office of a wirehouses for general investment advice may not provide you with a customized solution.
Service is King
For most investors, the main distinguishing factor between wirehouses and RIAs is the service model. Most RIAs have a team-based approach to client service instead of a sales-based approach, while big banks usually have a strong sales culture where hitting sales goals and quotas are heavily emphasized.
As a Registered Investment Advisor, ACG is primarily focused on providing outstanding service to our clients and helping clients meet their investing and retirement planning goals. In addition, we are held to the fiduciary standard so you can always be assured that the investment recommendations we make are in your best interest and there are no conflicts of interest in these recommendations.
Please contact us if you have more questions about how to choose an investment advisor.
