Q: What is an investment advisor?

A: According to the Investment Advisers Act of 1940 an investment advisor is any person who, for compensation, is engaged in the business of providing advice to others about securities. 

An investment advisor must be registered with the SEC or with the states where they do business and complete Form ADV which is a full disclosure of their business practices. Investment advisors are required to give their Form ADV to their clients when they sign an advisory contract. If you are considering using an advisor, you should ask to see their Form ADV before you sign a contract with them. 

Because all investment advisors are registered, they are often referred to as Registered Investment Advisors, or RIAs. However, just because investment advisors are required to register with the government does not mean that the SEC or any State has endorsed their business practices. Every investor should perform due diligence when selecting an investment advisor.

Q: What differentiates Registered Investment Advisors from other financial service providers, such as stockbrokers or financial planners?

A: The Investment Advisers Act of 1940 states that RIAs are required to maintain a fiduciary responsibility to always act in their clients’ best interests. In other words, RIAs must always put their clients’ interests ahead of their own. RIAs are required by law to do this, while stockbrokers and financial planners are not.

Another important difference is in the compensation of RIAs which is often a fee that is based upon a percentage of assets under management. This is similar to how a mutual fund charges its clients, but differs greatly from flat-fee providers, which charge a set fee regardless of asset values or the results of their advice, and commission-based providers, which earn fees with each transaction. Many (but not all) financial planners charge flat fees for advice, and most brokers and insurance agents earn commissions with every transaction. Read more about these differences NASAA.org.

Q: How is an Investment Advisor structured?

A: It is illegal for RIAs to take custody of client funds. As a result, RIAs must use broker/dealers (i.e. stockbrokers) to hold securities in client accounts. The client then signs an advisory agreement with the RIA, which provides the RIA with authority to buy and sell securities in the client’s account. A good advisory contract will allow the client to terminate the services of the RIA at any time without delay or penalty (such as a surrender charge) to the client.

Q: How does the fee-based model provide an incentive to keep costs low and improve performance?

A: We base our fees on the market value of your investment portfolio. We do not receive sales commissions on any client investments, and, unlike flat-fee providers, our compensation is tied directly to the performance of your investment portfolio. Therefore, our interest is to increase the value of your investment portfolio without taking inappropriate risks. We also have a strong incentive to minimize expenses by obtaining competitive commission rates and selecting optimal research and technology providers.

Q: How do you fit in with my existing team of professional advisors?

A: A good team of independent advisors, including CPAs, attorneys, and other professionals, enables individuals and small business owners to obtain timely advice that is unclouded by potential conflicts of interest. We routinely work together with other professionals on our clients’ team of advisors to ensure that our investment strategy is consistent with their overall financial plan.

Q: Why is independent financial advice important?

A: The primary benefit of using an independent RIA is freedom from potential conflicts of interest. If your investment advisor is part of a larger financial network that includes insurance, brokerage, banking, trust services, accounting & tax preparation, estate planning, or other “wealth management” services, there are probably incentives for your financial advisor have this company provide all of these services versus using service providers that will maximize the value added to your investment portfolio.

Another benefit of independent advice is its focus on a single line of business. As an independent RIA, GCM must survive entirely on its ability to provide satisfactory investment management services to its clients. With financial conglomerates, clients may sacrifice exceptional service for the benefit of the convenience of bundling their financial services with a single institution.

Independent financial advisors are free to choose relationships with technology, research, and brokerage providers. Most financial conglomerates have some or all of these services as part of their network, limiting their ability to shop around for better providers. Many larger financial firms also have investment banking relationships with publicly-traded companies that increase potential conflicts of interest with their retail clients.

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