The Importance of Independence
Written by: Rick Rodgers, AIF®, AIFA® and Kyli Soto, AIF®, CPFA®
Many things have changed over the past three decades, including the internet, telephones, cameras, and, of course, the advisory business. That business has seen an evolution of investment consultants, which, for a while, seemed to create much better conditions for investors. However, the advisory business has been recently reverting to self-interested arrangements, reversing much of the progress made.
Before Independence
Before the mid-1990s, most investors received investment advice from non-fiduciary providers, such as brokers, insurance companies, banks, or other vendors. These relationships were fraught with conflicts of interest, and advisors continually faced pressure to push self-interested proprietary products rather than act in the client’s best interest. Why would an advisor propose one product that may perform better and/or cost less when they could get paid to refer their own products or products with higher kickbacks that may not be as good?
The prevalence of conflicted arrangements spawned a new generation of advisors seeking a better way to deliver fiduciary guidance. The independent fiduciary advisor strives to do things the right way, not just the easy – or lucrative – way. This new breed parted ways with Wall Street firms, insurance companies, and banks to pave the path for unbiased, conflict-free advice to clients.
Richard Todd and Wendy Dominguez, Innovest’s co-founders, carved out this independence when they left Wall Street to create Innovest nearly three decades ago. Innovest became one of the country’s first completely independent, conflict-free advisory firms and has grown to advise more than $50 billion in client assets under advisement today.
The catalyst for Rich and Wendy to create Innovest was an incident in which they decided to terminate an investment manager (fund) in a client’s portfolio for poor performance and other measured reasons. However, their supervisor at the Wall Street firm directed them not to terminate the manager, in deference to a relationship in another area of the firm’s business. They had to do what was in the best interest of their firm rather than their client.
These issues were commonplace at the time, and others felt similarly compelled to do the right things the right way. The idea of offering objective advice that benefited the client became increasingly popular, as many other advisors wanted to escape the pressures of pushing certain investment products or proprietary services that benefited their parent company. That desire to do better and focus on what is best for the client led others to create independent firms like Innovest. As a result, hundreds of these independent firms were created nationwide.
Why Independence?
One of the primary advantages of working with an independent investment advisor is their unbiased guidance. Unlike advisors tied to specific financial institutions, independent advisors avoid incentives to promote particular products or services. Their guidance is rooted in a comprehensive market understanding tailored to each client’s unique needs and objectives. This impartiality helps build trust and encourages a more transparent advisor-client relationship.
Another key benefit of independent investment advisors is their access to a broad spectrum of financial products and services. The offerings of a single institution do not limit them. This allows them to scour the market for the best options, ensuring their clients' portfolios are diversified, cost-effective, and optimized for performance. The ability to choose from a wide range of products means that clients receive truly high-quality strategies rather than those that are merely convenient for the advisor's firm.
Working with someone who serves as a true fiduciary and does not just give it lip service or use it in their advertising is another positive. Independent advisors most often operate under a fiduciary standard that legally obligates them to act in their clients' best interest. This distinguishes them from brokers or non-independent advisors who may only be required to recommend "suitable" investments, not necessarily the best options available. The fiduciary standard ensures a higher level of accountability and integrity, providing clients with confidence that their financial well-being is the advisor's top priority.
Where is Independence Going?
After two-plus decades of solid evolution, many advisors are moving away from independence and re-engaging in self-interested activities. Many independent firms are now gone. There has been massive activity in mergers and acquisitions of these firms. Wall Street wirehouses, insurance brokerages, and large aggregator advisory firms have been acquiring independent firms of all sizes. In other words, the independents are selling out. Many of these advisors are bringing their clients to the same types of firms from which they departed, hoping to extract revenue from their clients in other ways.
The acquiring firms are, at times, paying exorbitant multiples (a measure of acquisition price) to bring these firms into their fold, hoping to access investors to find opportunities for individual wealth management services. The motive is apparent: sell proprietary investment products, add additional services at a cost, and/or roll retirement plan participants out of a group plan into proprietary IRAs as soon as they can access their money. In many cases, these are potentially prohibited transactions and, most certainly, conflicts of interest, but weak regulations allow crafty advisors to capitalize on this opportunity to monetize investor assets.
The new landscape creates new challenges for investors, committees, and boards responsible for selecting and monitoring their consultant/advisor. Adding new layers of proprietary products and services means new potential conflicts of interest must be identified and due diligence must be performed. Will investors need an independent advisor to monitor their current advisor’s potential conflicts? That seems ridiculous! Perhaps it is best to avoid conflicted advisors.
It is more important than ever for investors to understand whether their advisor is truly conflict-free. Innovest remains committed to serving as a steward, advocating on our clients’ behalf and consistently delivering objective, conflict-free advice. We have not created or distributed proprietary investment products, we do not participate in kickbacks or revenue sharing of any kind, and we do not receive any other form of compensation from our clients outside of our explicit consulting fee, nor will we. We see these practices as being in direct conflict with our commitment to serving the best interests of our clients. This is why we proudly stand, nearly three decades later, on the same foundational value we began with: Independence.