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Is Your Advice Off-the-Rack or Bespoke?

February 26, 2015

When it’s time to buy a new suit for work, I have two choices.

One option is to buy a custom suit from a master tailor near my office in downtown San Francisco. The other is buying an off-the-rack model at Jos. A. Bank or a department store.

As I was thinking about this recently, I was struck by the similarities between selecting a suit and choosing between an RIA and a wirehouse broker.

There actually is a lot more to that decision than meets the eye, so it’s worth going deeper into the analogy. Both suits, like both types of wealth manager, have their own merits. What’s important is that the buyer makes an informed decision.

Extra Time, Extra Attention

An independent advisor is much like an artisan tailor.

When I’m wearing a bespoke suit, I feel like a master of the universe. The suit fits perfectly, looks distinctive and expresses refinement. My name is embroidered on the inside, which dials up the mojo even further.

Like the craftsman, the independent wealth manager might do business out of a relatively small office. When clients visit, everybody in the office greets them by name. They get special treatment because everyone knows they are special — that individual or family helps keep the lights on.

When clients sit down with an independent advisor, wealth management solutions are customized. Investors get access to the finest money managers on the planet, and asset allocation is designed for their specific needs. If a client doesn’t fit neatly into one of the broad risk profiles — “conservative,” “moderate growth,” “aggressive growth” — the wealth advisor will fine-tune the allocation.

If a client wants to do direct deals in real estate, it’s no problem. The RIA will factor that holding into the overall asset allocation. Many advisors will also conduct the due diligence for such opportunities. If clients are looking at an equity private placement or a direct alternative investment, the independent advisor will often help evaluate those opportunities too.

Most independent advisors are amenable to assets outside their direct control. By contrast, the more restrictive rules at wirehouses discourage many outside holdings.

Most RIAs also deliver important information that clients may have difficulty obtaining from wirehouses: a clear summary of fees and performance reporting that doesn’t require the detective skills of Sherlock Holmes to comprehend.

The custom approach — whether it’s working with an RIA or purchasing a made-to-order suit — takes longer, but the results are superior.

Brand Recognition

If I’m in a rush and my wallet is a little pinched, I will head to Jos. A. Bank or the mall to buy a suit. The off-the-rack version doesn’t look or feel as good, but the benefit is that I can wear a 42-regular out the door.

Like mass producers of suits, wirehouse brokers try to make their customers feel terrific in a different way — by creating an aura of quality and invincibility. An expensively produced ad on CNBC or during the NFL season helps clients validate their decision to go with a wirehouse. Walking into a gleaming office tower in a financial district suggests big money and tends to make people feel confident.

To minimize the risks associated with managing many thousands of advisors who recommend investments, the wirehouses impose compliance constrictions that result in a cookie-cutter approach to asset allocation. These solutions are fine for many clients but not for those who want something unique. It’s simply not possible to oversee tens of thousands of advisors — and far more clients — without guidelines that narrow the universe of investment opportunities to name-brand firms.

When it comes to the actual investment choices, wirehouse offerings are good. But are they great? In truth, too many name-brand money managers made their reputation in prior investment cycles. That’s been my experience working for wirehouses earlier in my career.

The business-suit analogy breaks down when it comes to price. Whereas bespoke suits are far costlier than store-brand suits, there’s little difference between RIA advisors and wirehouse brokers when it comes to fees. For clients, the choice seems obvious. Wouldn’t we all look better in a custom-made suit than in an off-the-rack number that several other people at the meeting are wearing too?