An “Investor First” Approach When Choosing Your Product Offerings
September 3, 2019 | Clive Slovin | SFA Partners
Independent financial advisors make it their mission to meet the financial needs of their clients and make decisions that are in the best interests of those clients. The structure of an advisor’s business – whether through a broker-dealer, an RIA, or hybrid – should of course comply with the appropriate regulatory form, but that structure should not be the driving force nor should it set limits on how the advisor chooses to best serve his or her clients. By adopting an “investor first” approach, the advisor can better satisfy client needs.
The investing public can be divided in several ways, but for this instance we will focus on three distinct segments:
• Ultra-High Net Worth Investors: These individuals possess a large sum of investable assets and often an above-average risk tolerance for a portion of their assets. They have the access to and the ability to pay for appropriate financial guidance and can allocate resources to more sophisticated and complex investments and strategies for the opportunity to obtain higher rewards. For these clients, private equity products and other complex investments are often attractive as part of their portfolios.
• Relatively Low Net Worth Investors: On the other end of the spectrum are those individuals essentially living from paycheck-to-paycheck who have little in the way of investable income or assets. Much of the regulation required of the financial industry is designed to protect these individuals and to make sure they are not taken advantage of. Less complex investments with lower minimums are usually appropriate for these individuals.
• Aspiring Affluent Investors and Affluent Investors: In the middle ground between the high net worth and low net worth investors are these growing groups of investors. These individuals either have substantial income but not necessarily a large amount of investable assets or have accumulated assets in excess of their day-to-day living needs and can invest for the future. Much like the ultra-high net worth investors, aspiring affluent individuals have a variety of investment needs and, therefore, need access to a wide variety of products. But the challenge for many advisors is that many broker-dealers and RIAs have opted to not offer as wide or deep product offerings as are needed to satisfy these needs. Some firms shy away from certain products due to a perceived regulatory bias against them and possible negative association with high-profile litigation should the product fail. However, this becomes a roadblock for advisors acting in the best interests of their clients.
In order for a firm to offer more complex, non-traditional products, or any products for that matter, three things must be considered:
1) The advisor and the firm must perform extensive Due Diligence
2) The client must be suitable for the investment and understand the product and the possible risks involved
3) The advisor must consider, and educate the client, how that investment fits within the full portfolio
If we follow the rule of ensuring that products are vetted and well-constructed to meet the appropriate investors’ needs, they should be considered for inclusion in a portfolio. The financially qualified investors should then be given the opportunity to consider whether they are suited to take on the risk of investing. Regardless of the category of investor, the advisor should exercise the appropriate level of care when recommending investments, and a good advisor owes it to the clients to be acting in their best interests, and be neither too conservative nor too aggressive.
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