What are the principal differences between SEC Registered Investment Advisors and stockbrokers?
Registered Investment Advisors (RIA’s) are regulated by, and have filed a Form ADV with, the Securities and Exchange Commission and/or the particular state(s) in which they conduct business. The Form ADV is a standardized brochure presenting detailed information about the RIA, including past history of the advisor’s firm, the education and experience of the firm’s principals, investment management style, legal actions, if any, taken against the firm and its principals, fee structure and many other relevant pieces of information which an individual should consider when hiring an investment manager. RIA’s acknowledge their fiduciary status to their clients. Fiduciaries are held to a higher standard of professionalism than are non-fiduciaries. Most RIA’s manage portfolios of investments on a discretionary basis. Client assets are typically held at an independent custodian such as a bank or brokerage firm. RIA’s may be fee-based, commission-based, or both. Prospective clients should carefully assess how an RIA will be paid for services rendered and remain alert to conflicts of interest stemming from commission-based arrangements.
Investors who prefer to take full responsibility for their investment decisions might utilize a stockbroker directly, paying a commission for each transaction. Stockbrokers operate under a “suitability” standard, which is lower than the fiduciary standard under which RIA’s operate. Brokers are not fiduciaries to their clients.
Why would I use a Registered Investment Advisor rather than invest through mutual funds?
In an investment advisory relationship, the client’s specific goals, investment temperament and risk-taking capability are considered by the investment advisor when structuring a portfolio. Communication is two-way. A mutual fund has its own investment style and the investor must decide if that style is appropriate for his/her needs. Communication is one-way from the mutual fund in the form of quarterly and annual reports, and specific investor needs are not taken into account. An investment advisory relationship has the advantage that taxes can be controlled at the client level. Mutual funds operate as one large pool without taking any one investor’s tax situation into account.
Do I have any input into the construction of my portfolio?
Client input is sought initially when a relationship begins. We discuss with each client their objectives, time horizon, liquidity and income needs and tax considerations before we begin building a portfolio. Once this framework is established and agreed upon, it is formalized through a written investment policy statement (IPS). The plan is then implemented on the client’s behalf. The mix of investments will vary among clients depending on their situation. If the client’s personal situation changes in such a manner as to cause the IPS to no longer be an accurate representation of the client’s investment profile, then client input is requested to realign the IPS with their current situation. SIMI does not solicit specific investment suggestions from its clients.
How often to you communicate with me regarding my investment portfolio?
Each client receives a quarterly statement of portfolio assets and a narrative investment report from SIMI in addition to the brokerage or bank statement received from the custodian. After the first full quarter with SIMI, this report includes a calculation of the portfolio’s return. Returns are compared to widely followed market indices representative of the performance of the different types of investments owned in the portfolio. The portfolio managers of SIMI are also always available to answer any questions by phone, e-mail, or in person that you might have about your portfolio.
Some of the terms used are unfamililar to me… how might I research their meaning?
Client education is an important component of SIMI’s services. For new clients, and for those just getting started on their investment journey, we recommend using online resources such as investopedia.com.