As your company prepares to go public, it’s important to get the very best financial advice to make the most of this rare opportunity. The right experienced, trustworthy financial professional can keep you aware of important deadlines, tax rules, and other details that you will need to know as your investment in your company grows. When you’re looking for the right financial advisor, one of your top considerations should be what guides their decisions. Is it your financial best interest alone, or do they also have to consider their own income or their employer’s expectations when deciding what advice to give?
Financial Institutions
Financial institutions such as banks and insurance companies commonly employ registered representatives (RRs), who are empowered to make investments on behalf of the institution’s clients. However, financial institutions typically require their employees to recommend the institution’s investment products before others, regardless of whether they can be expected to provide the best value for the client.
Although the job titles sound almost identical, a registered representative is different from a registered investment advisor (RIA), and the two are held to different legal standards. A registered representative must adhere to the “suitability standard,” which requires only that the investments they recommend be suitable for the client, considering their investment goals, risk tolerance, and other relevant considerations. An RIA, on the other hand, must act as a fiduciary. This means that their recommendations must not only be suitable but must be in their client’s best interest. Fiduciaries are legally required to put their clients’ financial best interests ahead of their own.
Brokers
Brokers are another type of registered representative. If you work with a broker, it’s important to understand their fee structure. Brokers can earn money in several different ways, making fee transparency essential. The costs of using a broker can include brokerage fees, trade commissions, advisory fees, and others. Because brokers are paid from a variety of sources and are not fiduciaries, their priorities are necessarily divided between maximizing their clients’ investment returns and protecting their own livelihoods.
Family Offices
Family offices are full-service firms that can provide not just investment services but a host of other financial and personal services, such as making travel arrangements and employing domestic help. They’re most often used by ultra-high net worth investors (those with more than $30 million in investable assets).
The Investment Advisers Act of 1940 is the law that requires investment advisors to act as fiduciaries and follow other rules to ensure fair dealing. However, in 2011, the Securities and Exchange Commission (SEC) adopted a rule exempting family offices from the Advisers Act. This fact has come under scrutiny since the high-profile collapse of family office Archegos after it defaulted on margin calls this March. The SEC is currently expected to consider the larger implications of exempting family offices from the Advisers Act and review this policy.
Registered Investment Advisors
RIAs, as mentioned, are bound by the fiduciary standard to put their clients’ financial interests ahead of their own. Investment advisor representatives (IARs)—individuals who work at RIA firms—do not earn commissions on the investments they recommend, eliminating this potential conflict of interest. The best way for an IAR to secure their own livelihood is to do well for their clients, who are then more likely to entrust them with more assets and recommend them to others.
RIAs earn their money through client fees, which can vary from one advisor to the next. So, when shopping for an advisor, it’s important to ask about their fee structure. Some charge a flat percentage of the assets under management, and some have a tiered system, by which they charge a lower percentage for higher asset amounts. They may also charge different rates for different classes of assets, such as equities and fixed-income investments.
Dual-Registered Advisors
This type of advisor is perhaps the most confusing for consumers because they can choose to act as either an RR or IAR as it suits them in the moment. Working with a dual-registered advisor can make it difficult to discern whether your representative is providing fiduciary advice or simply trying to sell products to generate higher commissions.
Wealth Managers
Wealth management goes beyond investment advice. It can encompass financial planning, tax planning and preparation, advanced estate planning, charitable giving, and more. A wealth management firm that provides comprehensive, holistic financial services can be a distinct advantage because there is much more to managing wealth than maximizing investment returns. Strategic tax planning can keep the focus on after-tax gains, not just appreciation. Wealth management firms rely on investment advisor representatives to plan investment strategies with clients as well as tax professionals to engage in proactive tax planning.
WRP provides complete wealth management, specializing in helping employees and executives in pre-IPO companies navigate the exciting yet complex road to public offering. For more investment and wealth management insights, browse our blog!