The crisis bred "a certain level of distrust of Wall Street brokerage firms," says Bing Waldert, a director at Boston-based research firm Cerulli Associates. "Independents," he adds, "have been the chief beneficiaries."
Still, investors need to keep in mind that "independent" can have different meanings. The independents come in three basic flavors: brokers, registered investment advisers (RIAs), and dually registered advisers who can act in both capacities.
During the past five years, the number of RIAs has increased by almost 20% to 300,000. In part, that's because these advisers are held to a legal requirement that they act in clients' best interest. In contrast, the number of brokers—subject to looser "suitability standards" that require them to put clients into appropriate investments—is down 5.2% to 630,000, according to the Financial Industry Regulatory Authority, which regulates brokerage firms.
What is right for you will depend on factors including how much you have to invest, how much you can afford to pay, and whether you want someone to oversee your entire financial life or just pieces of it. It is also important to consider potential conflicts of interest your adviser may face.
"Anyone who manages money or sells investments faces some potential conflict of interest," says Sheryl Garrett, whose Garrett Planning Network, based in Shawnee Mission, Kan., consists of more than 325 RIAs.
Here are things to consider:
Q: What type of services do I need?
While brokers have historically focused on investment advice, RIAs may also provide tax and estate planning. Some even help clients with tasks like tracking medical bills and researching assisted-living facilities for a parent. Ask a prospect to list the range of services he or she provides, says Deena Katz, an associate professor of personal financial planning at Texas Tech University in Lubbock.
Q: How much do I want to spend?
Most RIAs pocket annual fees of 0.5% to 1.75% of assets under management. Brokers, in contrast, are typically paid commissions when clients purchase investments.
Advisers who are dually registered—as both RIAs and brokers—can be paid either commissions or fees or both. To minimize recurring fees, it may make sense to put assets you plan to hold long-term into a brokerage account, but pay for advice on your other holdings, says Ms. Katz.
Q: What are the potential conflicts of interest?
Brokers' income depends on commissions. They may have a financial incentive to steer clients to products that pay them the most.
Investors wary of such potential conflicts may want to consider an RIA. But even RIAs face potential conflicts. Because those who charge a percentage of an account's value earn more as the balance rises, they have an incentive to keep the money invested, rather than recommend that it be used to, say, pay off a mortgage, says Ms. Garrett.
Dually registered advisers can operate under a suitability standard when selling commission-based products. Some may also be affiliated with brokerage firms that restrict the products they can use.
Q: How much do I want to invest?
Many RIAs cater to those with $250,000 or more to invest. Those with less may be able to work with a dually registered adviser or an RIA who charges hourly or project fees, such as those in the Garrett Planning Network.
Q: How can I find an adviser?
Because many advisers charge nothing for an initial meeting, be sure to shop around. To find an adviser with financial-planning expertise, consider a certified financial planner. In addition to passing a two-day exam, these individuals must have at least three years of relevant experience.
Check your pick's disciplinary records at your state's securities regulator or—for RIAs at firms that manage $110 million or more—with the Securities and Exchange Commission.
You can also search for records at BrokerCheck.finra.org.
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