Every so often I experience one of those moments where I find myself asking colleagues or friends: “Could you have even IMAGINED this happening 10 years ago?”
I had a moment like that just the other day, during the simple act of ordering pizza for a hungry crowd at a recent family gathering. Through an app on my phone I ordered $80 worth of pizza from my favorite local shop through a series of four clicks in less than 60 seconds. A few moments later, I heard three “dings” on my phone, signifying I had just received three payments of $20 via a mobile payment service, Venmo — courtesy of those in the room kind enough to split the bill.
This high-tech process is something the creator of the first modern pizza back in 1889 could not even begin to imagine. We are talking about Italian baker, Raffaele Esposito, who made a pie complete with tomatoes, mozzarella, and basil to represent the colors of the Italian flag. Esposito’s creation was in honor of his guests, King Umberto I and Queen Margherita, hence, the birth of the now-classic Margherita pizza.
While there are many ways to order a pizza today - in the age of smartphones, smart cars, and smart everything - we find the modern way we used at our party strikingly efficient and beneficial to everyone involved. That is similar to how we feel about the evolution of the investment advice industry over the past 130 years.
In the days of Esposito, investors had few options when looking to put money into the markets. Most likely, an 1890s baker would have gone into the bank or contacted their local stockbroker. The stockbroker, if you were lucky enough to know one, would have been an employee of a Wall Street-based brokerage firm or wirehouse (at the time, these New York-based firms were connected to their branch offices by dedicated telegraph lines.) Today, the landscape has changed significantly, and investors have a number of options through which to access investment vehicles and financial advice.
Often when people think money, they think banks. There is a convenience factor here along with a perception that banks are less risky than other models. While some investors find comfort that all their dollars are under one roof, banks are often limited in the types of investment vehicles they may offer. Additionally, FDIC protection only applies to deposit accounts and does not extend to investment accounts.
Full Service Brokerage (a.k.a - wirehouses)
Although the telegraph is obviously no longer the primary means of communication, these firms still custody a significant portion of the country’s investable wealth. National firms such as Merrill Lynch, Morgan Stanley and UBS offer a wide array of services on either a fee or commission basis. While scale, access to investment vehicles and marketing dollars are viable benefits, many investors have grown weary of these firms based on Wall Street’s involvement in the 2008 financial crisis (the full senate report can be found here).
Similar to full-service brokerages, discount brokerages also offer direct access to investment vehicles but without much of the expense and overhead associated with their wirehouse competitors. Companies like Schwab, Fidelity, E-trade and TD Ameritrade are a few examples. Accounts can typically be opened online, and this strategy is often employed by the “do-it-yourself” trader.
Independent Broker Dealers
The best way to describe these firms may be using a franchise or independent contractor analogy. The financial advisor is a contractor (generally not an employee) of the parent company. Examples include LPL, Raymond James or Edward Jones. The advisor has the ability to access investment vehicles and back-office operations through the parent company, but generally has the ability to control pricing, service offering and customer experience at the “local” level.
Registered Investment Advisors (RIAs)
There are two primary factors that differentiate independent RIAs from banks and brokerages. The first is a “third-party custodial relationship.” For example, while Sequoia may be your investment advisor, the third-party custodian could be Schwab or Fidelity. This creates a system of checks and balances for the investor because the advisor does not actually take custody, or possession, of your assets.
Second, RIAs and their advisors are required to adhere to the fiduciary standard. The Fiduciary Standard requires the advisor to put the client’s interest ahead of their own and always act in the best interests of the client. This standard applies as long as the investor is a client of the firm, not just at the point of sale. Additionally, all independent investment advisors are required to maintain ongoing registration and oversight with the Securities Exchange Commission (SEC).
We at Sequoia believe an RIA relationship and an adherence to The Fiduciary Standard is at the top of the evolutionary scale when it comes to selecting a prudent and common sense means to obtaining financial guidance. An RIA, combined with a financial plan and a trusting advisory relationship is a recipe that will endure the test of time. Just like Esposito’s recipe for Queen Margherita.