//Why high-wealth investment advisors should adopt the U.S.’s RIA model

Why high-wealth investment advisors should adopt the U.S.’s RIA model

“Stop going for the easy buck and start producing something with your life. Create, instead of living off the buying and selling of others.” — Carl Fox, Wall Street (1987)

When it comes to wealth management, Canada’s big banks have so far proven to be un-disruptable thanks to their oligopolistic nature.

Consequently, they continue to operate like the large U.S. wirehouse brokers did in the 1980s and 1990s, with their stock brokerage divisions still in control of their wealth management platforms. This means their primary focus remains on “selling” research, proprietary products, investment advice and order execution instead of building out a robust, fee-based fiduciary platform.

Unfortunately, the nature of this structure can often result in near-term performance taking the driver’s seat when it comes to investment allocation decisions.

It’s a much different story in the U.S., where there is a vibrant and rapidly growing independent Registered Investment Advisor (RIA) channel that not only has been stealing market share but also influencing how the wirehouses operate, thereby changing the entire industry in favour of the client.

An RIA essentially encompasses those advisors who are registered by the Securities and Exchange Commission and are considered to have a legal obligation to act in the best interest of their client, not unlike a lawyer or accountant. This compares to most broker-dealers who only have to demonstrate suitability of the financial products they are selling.

The RIA channel is growing because advisors have been leaving the banks and taking their clients with them, seeing much better value in offering a fiduciary service compared to those wirehouses that choose to remain focused on selling financial products — preferably their own proprietary ones at that.

Upon our own extensive review of the U.S. RIA market, we’ve noticed that the most successful and fastest growing independents are the ones that have built in a comprehensive financial planning service that then drives investment portfolio design and implementation, including future allocation decisions.

This process lines up quite well with the needs of high net worth investors, by identifying their primary goals and then working in a conflict-free way to meet them.

For high net worth investors, those goals usually involve wealth protection and tax minimization, rather than owning the hottest financial products or being afraid of missing out on what everyone else is doing.

This process lines up quite well with the needs of high net worth investors, by identifying their primary goals and working in a conflict-free way to meet them.

It is interesting to note that the Canadian industry runs the risk of promoting products that do not always line up with those goals. Perhaps it isn’t a shock then that many in Canada do not have a financial plan and investment portfolio that encompasses estate planning, tax impacts and asset protection.

Not surprisingly, the U.S. is doing a much better job of meeting high net worth investor objectives: According to the 2018 U.S. Trust Insights on Wealth and Worth, two-thirds of high net worth families in the U.S. now have a financial plan to protect their wealth.

That said, this doesn’t mean that advisors up here don’t want to embrace this model; I was shocked by the tremendous response I received to my recent column on why Canada’s wealth management sector is ripe for disruption. Advisors clearly see the writing on the wall, witnessing their payouts slowly being cut over time (known as “the grid”) as the banks appear to be setting the stage to eventually take control over their advisors’ clients, knowing full well they don’t have many options other than to move to another wirehouse using the same strategy.

Given the size of portfolios these advisors are managing, we believe there is a tremendous incentive for the American-style RIA model to eventually work its way into Canada, something that would be a win-win for both Canadian investors and their advisors.

• Martin Pelletier, CFA is a Portfolio Manager and OCIO at TriVest Wealth Counsel Ltd, a Calgary-based private client and institutional investment firm specializing in discretionary risk-managed portfolios as well as investment audit and oversight services.

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