The Importance of Independence

By: Rick Rodgers, AIF®, AIFA® and Kyli Soto, AIF®, CPFA®

Many things have changed over the past three decades, including the internet, telephones, cameras, and, of course, the retirement plan advisory business. That business has seen an evolution of investment consultants, which, for a while, seemed to create much better conditions for retirement plans and their participants. However, the advisory business has been recently reverting to self-interested arrangements, reversing much of the progress made.

Before Independence

Before the mid-1990s, most retirement plans received investment advice from non-fiduciary providers, such as brokers or recordkeepers. These relationships were fraught with conflicts of interest, and advisors continually faced pressure to push self-interested proprietary products rather than act in the best interest of retirement plan participants. Why would an advisor propose one product that may perform better and/or cost less when they could get paid to refer their own products that may not be as good?

The prevalence of conflicted arrangements spawned a new generation of retirement plan advisors seeking a better way to deliver fiduciary guidance. The independent fiduciary advisor strives to do things the right way, not just the easy – or lucrative -- way. This new breed parted ways with Wall Street firms, insurance companies, and banks to pave the path for unbiased, conflict-free advice to retirement plan sponsors.

Richard Todd and Wendy Dominguez, Innovest’s co-founders, carved out this independence when they left Wall Street to create Innovest nearly three decades ago. Innovest became one of the country’s first completely independent, conflict-free retirement plan advisory firms and has grown to advise more than $50 billion in client assets today.

The catalyst for Rich and Wendy to create Innovest was an incident in which they decided to terminate a manager (fund) in a client’s portfolio for poor performance and other measured reasons. Their supervisor at the Wall Street firm directed them not to terminate the manager, however, in deference to a relationship in another area of the firm’s business. They had to do what was in the best interest of their firm rather than their client.

These issues were commonplace at the time, and many others felt compelled to do the right things the right way. The idea of offering real advice that benefited the client became increasingly popular.  as many other advisors wanted to escape the pressures of pushing certain investment products or proprietary services that benefited their parent company. That desire to do better and focus on what is best for the client led others to create independent firms, similar to Innovest.” As a result, hundreds of these independent firms were created nationwide.

Why Independence?

One of the primary advantages of working with an independent investment advisor is their unbiased guidance. Unlike advisors tied to specific financial institutions, independent advisors avoid incentives to promote particular products or services. Their guidance is rooted in a comprehensive market understanding tailored to each client’s unique needs and objectives. This impartiality helps build trust and encourages a more transparent advisor-client relationship.

Another key benefit of independent investment advisors is their access to a broad spectrum of financial products and services. The offerings of a single institution do not limit them. This allows them to scour the market for the best options, ensuring their clients' portfolios are diversified, cost-effective, and optimized for performance. The ability to choose from a wide range of products means that clients receive truly best-in-class strategies rather than those that are merely convenient for the advisor's firm.

Another key benefit is working with someone who serves as a true fiduciary and does not just give it lip service or use it in their advertising. Independent advisors often operate under a fiduciary standard that legally obligates them to act in their clients' best interest. This distinguishes them from brokers or non-independent advisors who may only be required to recommend "suitable" investments, not necessarily the best options available. The fiduciary standard ensures a higher level of accountability and integrity, providing clients with the confidence that their financial wellbeing is the advisor's top priority.

Where is Independence Going?

After two-plus decades of solid evolution, many advisors are moving away from independence and re-engaging in self-interested activities. Many independent firms are gone. There has been massive activity in mergers and acquisitions of these firms. Wall Street wirehouses, insurance brokerages, and large aggregator advisory firms have been acquiring independent firms of all sizes. In other words, they are selling out – many of these independent advisors are bringing their clients to the same types of firms from which they departed, hoping to mint money off their clients in other ways.

The acquiring firms are at times paying exorbitant multiples (a measure of acquisition price) to bring these firms into their fold, with hopes of accessing the individual retirement plan participants. The motive is apparent: sell proprietary investment products, add additional services at a cost, and/or roll these participants out of the plans into proprietary IRAs once they retire. In many cases, these are prohibited transactions, but weak regulations allow crafty advisors to capitalize on this opportunity to monetize retirement participants’ assets.

The new landscape creates new challenges for retirement plan sponsors who are responsible for selecting and monitoring their consultant/advisor. Adding new layers of proprietary products and services means new potential conflicts of interest to identify and perform due diligence. Will plan sponsors need an independent advisor to monitor their current advisor’s potential conflicts? That seems ridiculous! Perhaps it is best to avoid conflicted advisors.

It is more important now than ever for plan sponsors to understand whether their retirement plan advisor is truly conflict-free. Innovest remains committed to serving as a steward, advocating on our clients’ behalf and consistently delivering objective, conflict-free advice. We have not created or distributed proprietary investment products or advisor-managed accounts, nor will we. We see these practices as being in direct conflict with our commitment to serving the best interests of our clients. This is why we proudly stand, nearly three decades later, on the same foundational value: Independence.