INVESTMENT ADVISOR RESEARCH
Evaluating Investment Advisors
The approach you take for managing wealth is one of the most important factors influencing your long-term results. I help people develop an independent and comprehensive analysis of potential investment advisor options including outsourced, internal, and hybrid solutions.
Please see the framework below to get a better understanding of the types of advisors and advisory firms.
Martiros Investment Advisor Map
Investment Advisor Business Models
Whether you’re looking to choose an advisor for yourself, or acting on behalf of someone else as a fiduciary, a trustee, a member of an investment committee, or a family office executive, it’s crucial that you understand the various business models of investment advisors. That process begins with understanding how investment advisors actually do their job for their clients.
Advisors start by creating what’s known as an investment policy statement, or IPS, which provides guidelines for overseeing each client’s portfolio. As part of the IPS, the advisor develops an asset allocation, which is a big-picture plan for the asset classes that the client’s money will be invested in. When advisors talk about asset classes, they mean overarching investment categories—things like cash, bonds, stocks, real assets, and also alternative investments such as hedge funds, private equity, and derivatives.
Once the client approves the IPS, the advisor shifts to what’s known as portfolio construction, which involves putting the client’s money into a mix of investment products. This is where you’ll want a clear understanding of the advisor's financial incentives since they may impact the investment recommendation that your advisor makes.
Essentially there are three different business models based on how an advisor makes money. With an Advice Business Model, the advisor only makes money from charging a fee for advice and uses external investment products in which they have no financial interest. The Product Business Model is where the advisor makes money from recommending the firm’s own proprietary investment products, but does not charge any fee for advice. The Hybrid Business Model is where the advisor makes money from charging for advice and also earns fees for external and proprietary products.
Advice Business Model
The investment advisor charges a fee for investment advice, but does not use any of its own products, or share in any of the investment fees for the funds that it recommends.
Product Business Model
The investment advisor does not charge a fee for advice, but instead earns money from investment fees on its own products or from the products it recommends.
Hybrid Business Model
The investment advisor charges a fee for advice, and may also use its own products or external funds it recommends.