For Advisors

3 Ways Investment Professionals Should Put Client Interests First


Within weeks of taking office, the Trump administration reversed a regulatory effort that put a spotlight on the commissions advisors receive from retirement accounts — forcing the Department of Labor (DOL) to put its “investment fiduciary rule” on hold. Whatever the rule’s final disposition, we applaud the idea behind the rule — namely the concept that professionals who manage money should work in their client’s best interest, regardless of fee arrangements.

While the term “investment fiduciary” is broad, typically it refers to anyone who has the legal responsibility for managing somebody else’s money. They can be a financial advisor, money manager, banker, accountant and more. Investment fiduciaries are legally and ethically bound to act in their client’s best interests.

This is especially important for high net worth investors. It means the person who they entrust their money to should be committed to putting them in investments that meet their investing goals. While the pending DOL fiduciary rule is meant to hold advisors who manage a client’s retirement funds to this standard, we believe alignment of interests is necessary for every kind of investment.

Unfortunately today many investment professionals are not fiduciaries and are only held to the “suitability” standard, which could compromise the returns of high net worth investors. This means they can legally recommend investments that line their pockets with commissions, as long as they feel the investment is “suitable” for the client. For example, advisors at companies such as Goldman Sachs and JPMorgan Chase sell many of their own commission-driven products because they are incentivized to do so. Some of the most efficient investment products in the market today, such as Vanguard Funds, don’t pay anyone to sell their products. Therefore, investors may miss out on these opportunities since advisors and money managers certainly don’t want to work for free.

A recent Financial Industry Regulatory Authority (FINRA) investor alert also points out the importance of investors giving careful review to public and private real estate funds in particular, as these managers are not legally obligated to do what is in an investor’s best interest. As a manager of a private real estate fund, I’ve spent many hours talking to high net worth investors who have taken this message to heart and are interested in how funds work and how fees affect returns. For that reason, we tell high net worth investors to look for the three defining features to determine if someone managing their money has their best interests in mind:

1. Managers with “skin in the game.” Investment managers should stand to gain only if their investors are successful. The best alignment of interests happens when managers invest in the same products they sell to investors, or when their personal payout hinges on a successful outcome. At Origin, my partner David Scherer and I have personally invested $56 million alongside investors in all of our projects and funds since our inception in 2007.

2. Commissions. Beware of products that are sold. Non-traded REITs pay advisors large commissions to sell their products and can have a front end load as high as 18 percent, which means that only 82 cents of every dollar is put to work producing income for the investor. No one would buy an investment knowing they would lose 18 percent on the first day. At Origin, we don’t believe in paying people to sell our products. Therefore you won’t find our funds being offered by commission-based advisors. Investment success starts by being efficient and our goal is to put 98 cents of every investor’s dollar into the investment property.

3. Strong risk management controls. A disciplined investment team has safeguards in place to minimize risk. They use debt responsibly, without over-borrowing or putting up multiple properties as collateral for a single loan. Each property should have a well-defined investment strategy that is transparent to investors, and monitored to stay on track.

Changes in the regulatory landscape make it very clear that investors must be proactive when vetting investment opportunities. A firm understanding of their wealth-building goals and a willingness to screen the people managing their money using the above questions will help them choose investment professionals who are aligned with their goals and will work to their mutual benefit.

This article is intended for informational and educational purposes only and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The information is provided as of the date indicated and is subject to change without notice. Origin Investments does not have any obligation to update the information contained herein. Certain information presented or relied upon in this article may come from third-party sources. We do not guarantee the accuracy or completeness of the information and may receive incorrect information from third-party providers.