Investment Transparency: Model Portfolios from Broker-Dealers

For many investors, the difference between a broker-dealer and a Registered Investment Advisors (RIA) may seem confusing. This can be especially true when it comes to your investment portfolio and how those investments were introduced to you. Are you confused about how your portfolio was built for you? We want to remove the veil, so that you have a better idea of what’s best for you.


First, understanding why a broker-dealer would even create model portfolios is essential. If you’ve purchased investments through broker-dealer, at some point the financial advisor conducted an investor profile and produced a financial plan suggesting you invest in a particular model portfolio. Let’s call it Portfolio X. Portfolio X has a particular asset allocation that is a reflection of your risk tolerance. It is made up of multiple funds selected by the broker-dealer and not the broker/advisor. Are you aware that all the questions asked in the investor profile and the resulting plan was to place you into Portfolio X?

Is this is your only option? Is this best for you?

A broker-dealer typically makes money on what is called a wrap fee, which can be 1% of your assets, and also in the form of kick backs from the mutual fund or insurance companies. The latter arrangement is particularly unfortunate because the brokers are not allowed to sell other products or portfolios outside those offered by the broker-dealer, as it is considered ‘selling away.’ To be explicit, this means that the broker’s advice has inherent conflicts of interestthey can only sell products that are providing kick backs. If this sounds a bit sleazy, well, it’s because it is. Are there better investment products available? It doesn’t matter in these one-sided relationships.

Alternatively, the advice from an RIA is considered unbiased because they are independent of a bank and are free to recommend any investment product. SWS Partners, therefore, can recommend any fund, stock, etc., from any custodian. This approach tends to be less rigid and more objective. We think that this unconstrained approach is beneficial to investors in that they simply have more options to choose from, as opposed to a model portfolio that was built with backroom deals.

In many instances, especially if you’re in a model portfolio offered by a broker-dealer or your financial institution, you’re not the one benefiting from the portfolio recommendation. If you would like to discuss your structured portfolio and how best to get out of it, we can advise you on other options that are in your best interest after we get to know you.