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What is the Difference Between a Large Brokerage House and a Boutique Investment Advisor Firm?

Unless you are a do-it-yourself investor, finding the right financial advisor(s) to guide you is one the most important choices that you can control towards having a comfortable and worry free future. 

A good or even great advisor can be invaluable in helping you build wealth, minimize risks and liabilities, and secure your family’s future while the wrong advisor or just a few self directed mistakes can cost you millions in bad investments, lost opportunity costs, and unnecessary fees or losses. 

Where your trusted advisor works and how they are incentivized for their work can have a real impact on your investments and the quality of outcomes you can expect.  

In this article, we discuss some of the differences between large and often brand name brokerage firms such as, but not limited to, Merrill Lynch, Morgan Stanley, Goldman Sachs Wealth Management, LPL, Edward Jones and others and smaller more nimble Registered Investment Advisor firms like our own firm Ridgewood Investments.

Some Benefits and Downsides of the Big-Name Brokerage Firms

Large, brand-name brokers are globally recognized and employ thousands of people and tend to be public traded companies. The big firms allocate substantial advertising budgets and employ large marketing teams to reach millions of potential clients. In-house research analysts and other employees offer guidance and market information to their frontline brokers (who also call themselves private client advisors these days).  These representatives have securities licenses and are allowed to sell products on a commission.

Large brokerage firms market their products all over the country usually through hundreds of local offices, so finding a firm and beginning to invest is typically convenient for new clients. Name recognition and the size of these firms can provide a sense of security for their clients.

For clients who prefer a hands-off approach and don’t have strong opinions on investment strategies, they may enjoy the convenience of having the big-name firm custody their investments and perhaps provide a quarterly update meeting.

However, each of the brokers at large firms may be responsible for hundreds or even thousands of clients sometimes working within a team of several junior and senior brokers.  As a result of this set up, at least at some large firms, each broker can have less time for personalization and building deep expertise in investments.  Clients of these larger firms are often put into cookie-cutter asset allocation portfolios.  If you go to presentations with your broker and are shown one or more pie charts every time, this may be an indication that this is what you have.

On the plus side, big brokerage houses offer a wide variety of financial products on their platforms as the model involves selling many different products through their large distribution systems. Due to their market share, big-name firms can sometimes offer investment opportunities that not all boutique advisors have access to, for example in areas like private equity and perhaps even venture capital.  However, when these products are offered, they often generate commission dollars for the broker - and this can create unwanted conflicts of interest.

A big drawback of the large brokerage firm model is that individual brokers are often only allowed to sell their own firm’s products or a very limited menu offered by the firm due to the way these platforms work. Even if the advisor realizes that a third party solution would be a better fit for your portfolio, the advisor can’t or won’t recommend it since their hands are often tied by their employer’s platforms.

Because of their large size, the larger firms often employ far more layers of management and support staff as well as their overhead of rents of prime high street office spaces in city centers and large advertising budgets.  As a result of these overheads, big brokers can have fees and commission structures that match these high overhead costs and these platforms tend to be far less nimble and entrepreneurial than smaller advisory firms.

Another drawback of the large firm model can be that brokers often work under a suitability standard.  This is a lower standard of care than the fiduciary standard that smaller independent investment advisors are held to.  This means that brokers can get by with certain situations, like accepting a greater portion of their incomes based on commissions even though this kind of compensation structure often leads to more conflicts of interest.

Benefits and Downsides of a Boutique Financial Advisory Firm

A boutique investment firm is a smaller financial advisory firm that provides specialized financial services to a particular market - typically targeting clients who fall into the high net worth segments of the spectrum from an income and net worth criteria.  Unlike larger firms, most boutique firms have anywhere from several up to perhaps a few dozen advisors in some of the larger practices. 

Boutique firms typically have a lower advisor to client ratio than the big firms.  As a result, boutique firms can offer a more personal relationship with your advisor. With fewer but on average larger clients, boutique advisors are more likely to be proactive in their approach to your investments and even the advice that they provide. If a deeper relationship is important to you, exploring a boutique firm as an option might be a good fit.

Most boutique firms focus on certain specialties or niches.  Some firms such as Ridgewood Investments lead with long term investing managed in-house by CFA charterholders, while others may focus on certain client niches.  Luckily, in an Internet connected world it is easier to find a boutique firm advisor, even one who is not geographically in your area. You no longer need to live in the same town as your advisor to have regular access to their advice and the COVID pandemic and the move to video conference platforms like Zoom has accelerated this transition even further.

Most boutique firms are fee only, meaning they aren’t incentivized to sell you certain products in order to earn a commission. In fact at fee-only firms like ours, we never work on or accept commissions and thereby are often able to avoid such obvious conflicts of interest.

Instead, fee only investment advisors typically charge a percentage based on assets under management and/or a flat hourly rate or incentive fee.  Unlike commissions which are generated when you transact, the fee-only advisor typically only makes more money when they succeed in growing the value of your assets. 

Another large difference is that most boutique investment advisors are set up as SEC Registered Investment Advisors.  They often hold themselves to a higher legal standard of care called the Fiduciary Standard.  This means that they must put their clients interests first and ahead of their own interests.  One of the ways this can make a practical difference is that fiduciary advisors must avoid conflicts of interest and if faced with any unavoidable conflict of interest, they must disclose these conflicts to their would-by clients to make the clients aware.

Another difference is that boutique advisors generally have less overhead structures - in some cases this can mean more direct access to advisors and more flexibility on fee structures that reflect their lower overhead expenses.  Despite their smaller size, however, boutique advisors can leverage the technology platforms of the larger custodian firms such as Charles Schwab and Fidelity Investments who specialize in working with independent and boutique RIA firms.  The scale of these large custodian platforms allows smaller firms to access almost all the same investment and financial options as many of the large brokerage firms.

The more sophisticated boutique firms like Ridgewood Investments use their size and entrepreneurial cultures to create access to more custom and personalized options.  At Ridgewood Investments, for example, we have in-house expertise in management portfolios not only of stocks and bonds, but also in income producing commercial real estate, crypto currencies, private debt and even multifamily office services.  For advisors to be able to manage and offer such a breadth of investments that they themselves create and manage would be impossible at large brokerage houses.

Ridgewood Investments - Boutique Financial Advisory Firm to consider

Ridgewood Investments is a boutique financial advisory firm run by advisors with Wall Street experience offering unique investment opportunities not available at many other boutique firms. We treat every client as a partner or member of our extended family and strive to protect and grow their investments to achieve their long-term goals.

Our turnkey approach allows you to focus on what matters most to you while we draw on our decades of in-house experience and research to create customized investment portfolios. Our financial advisors practice value investing, using a variety of long-term strategies to grow your wealth and reduce your tax burden while focusing on long-term gains. You will be able to rest easy knowing that your money is being managed by a top tier team of Ivy-league or equivalent educated advisors. Our responsive team of dedicated customer service professionals ensure that help is always only a phone call away for whatever questions come up. 

Learn more about our investment philosophy: https://www.ridgewoodinvestments.com/about.

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High Net Worth Financial Advisor New Jersey

About the Author

Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.

Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.