Big Firm Broker or Boutique Fiduciary? The Secret’s Out.

Why Fiduciaries are now in vogue….the real reason may cause you to reconsider.

When selecting an advisor: Big Firm Broker or Small Independent Fiduciary? For generations, the answer for many was simple: bigger meant safer, and thus better. The thought was, why argue with tradition? That is, until the sub-prime mortgage crisis of 2008 unmercifully dismantled one of Wall Street’s oldest and most traditional firms – Lehman Brothers. As a result, the trend has dramatically shifted away from the big Wall Street brokerage firms, regional trust companies and banks, to that of boutique independent fiduciaries.

In fact, in the wake of both the 2000- ’02 and 2007-’09 market declines, there was a 31% surge between 2004 and 2010 toward independent fiduciaries according to Cerulli Associates Inc. Moreover, a survey from the Luxury Institute concluded that even high-net-worth investors (with $5 million or more in assets) prefer boutique fiduciary firms over Wall Street giants as well.

Why the shift?

While Luxury Institute CEO Milton Pedraza says “reputations for honesty and superior client service are what make the smaller firms standout”…increasingly clients cite frustration as the real reason.

Specifically, frustration with their experience during market declines.

Unfortunately, the “buy-and-hold modern portfolio theory” strategies, traditionally implemented by the establishment firm’s brokers, failed to provide clients with any substantial relief from the last two market crashes. As a result, many began seeking out the guidance of an independent fiduciary as an alternative.

What is a Fiduciary?

The concept, as recently reported in the Wall Street Journal, was best described on an episode of HBO’s “Last Week Tonight with John Oliver”.

“Generally, it is currently legal for financial advisers to put their own interests ahead of yours, unless—and this is interesting—they are what’s called a ‘fiduciary.’ Because not all financial advisers are bound to act in your best interest, but fiduciaries are, which is a bit weird,” Mr. Oliver explained.

While many firms claim they are a Fiduciary, they still maintain dual licensing enabling them to earn investment commissions from your money. A TRUE fiduciary does NOT utilize retail mutual funds, variable annuities, or any of the normal commissioned based investments usually “sold” by sales people at trust companies, banks, or brokerage firms. As such, we must retain our clients for nearly seven years to earn what a commissioned broker makes in just one day. With that in mind, where do you feel your best interest would be served?

Hence, the shift by high net worth investors.

Aside from that, why would a smaller independent Fiduciary be any different?

In a word – choices.

While larger firms certainly have choices, their business model can be a bit restrictive in down markets- thus hindering their ability to act as a fiduciary. Specifically, they tend to follow a mantra of maintaining a fully invested client position regardless of market conditions – hoping the allocation of assets within the portfolio will be sufficient to mitigate downside risk. Unfortunately, that’s not been the case. As such, many investors working with these firms watched as their portfolios declined along with the market.

Conversely, boutique independent fiduciaries with access to institutional strategies typically reserved for pension plans, endowments and the super wealthy, saw very different results.

What’s so special about these strategies?

These highly disciplined low risk, low volatility quantitative strategies are defined by a clear and simple philosophy – to protect you from severe losses in down markets, while providing quality participation in rising markets. This approach, similar to that employed by large charities like Carnegie Mellon and The American Cancer Society, resulted in significantly reduced downside risk, sidestepping the negative returns of 2002 and 2008. Certainly compelling.

So why do many investors remain with the big named firms?

In most cases it’s due to perception.

For generations, the conventional perception was that by selecting brokers with a big name firm, Trust Company or Bank, your assets would not only have more options, but be more secure.

While in fact, boutique Fiduciary firms like Toole Kinney & Company not only have more unique options (see above), they secure client assets with some of the biggest and most trusted custodial firms such as Fidelity, TD Ameritrade and Trust Company of America . Doing so insures transparency, access, and security of client assets meet or exceed that available at larger firms.

Which brings us back to the initial question…Big Establishment Broker or Independent Fiduciary?

Only you can decide.

However when you consider…

• Declining trust in larger firms in the wake of the 2008 financial crisis.
• Transparency, access, and security of client assets at independent fiduciaries now meet or exceed that available at larger firms.
• Superior reputation for honesty and service at smaller fiduciary firms.
• Access to strategies that sidestepped negative returns of 2002 & 2008, yet unavailable to average investors through establishment firms.

…you too may find the boutique fiduciary experience a refreshing change.

Contact Mark Kinney, CFP at mark@kinneywealth.com or visit us online www.kinneywealth.com to learn if a boutique Fiduciary firm is right for you. It all starts with a short conversation.

For more on the strategies mentioned above, view “Why your IRA is at risk…and how to correct it”