Cooperative Values, Fiduciary Advice, Service vs Sales: RIA Model's Fit for Credit Unions

When looking to offer wealth management programs, credit unions are often faced with a choice between a third party brokerage or Registered Investment Advisor (RIA) arrangement model. Traditionally credit unions have implemented a third party brokerage model, however the RIA model presents several distinct advantages that align more closely with the cooperative values and member-focused ethos of credit unions.

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RIA vs. Brokerage
The terms brokerage and RIA are often used interchangeably, however there are key differences between the two models largely centered around standards, compensation, services provided, and member relationships.
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Fiduciary Duty vs. Suitability Standard: 
RIAs: Are held to a fiduciary standard. The fiduciary standard requires an advisor to prudently act in the best interest of members when providing financial advice. The fiduciary standard cannot be waived or disclosed away.
Brokers: Are held to a suitability standard. The suitability standard requires that a broker only needs to check the suitability of a prospective product, based primarily upon financial objectives, current income level and age, in order to complete a commissionable transaction.

A useful analogy popularized by financial blogger Michael Kitces is: “Suitability means selling a suit that fits you. Fiduciary duty means it actually has to look good on you, too."

Compensation Models: 
RIAs: Typically earn income through fees, which can be structured as a percentage of assets under management, flat fees, or hourly fees. This fee-only structure is seen as aligning the advisor’s interests with those of the client. 
Brokers: Often receive commissions based on the products they sell or trade. This can lead to potential conflicts of interest if the broker is incentivized to sell products that generate higher commissions. Members are often unaware of many non-transparent or complicated fee products.

Nature of Services: 
RIAs: Generally provide more comprehensive financial planning and investment management services. This includes estate planning, retirement planning, tax strategies, and more holistic wealth management. 
Brokers: Primary role is to facilitate the buying and selling of securities. While some brokers also offer advisory services, their core function is more transactional.

Client Relationship: 
RIAs: Often build long-term relationships with clients, focusing on ongoing financial planning and investment management. 
Brokers: Client relationships are often more transaction-based, centered around specific investment purchases or sales.

It is crucial to understand the operating differences between a RIA and brokerage model when selecting a wealth management program for members.

​The RIA Advantage
In comparison to the brokerage model, the RIA model’s structure allows credit unions to implement a wealth management offering that is more in line with the cooperative values and member focused mission. 

Enhanced Trust and Transparency
The RIA model operates on a fiduciary standard, requiring advisors to put their clients' interests above their own. This level of trust and transparency is more in sync with the credit union’s member-first philosophy. In contrast, third-party brokerages often operate on a suitability standard, which doesn't necessarily require recommendations to be the best for the client, as long as they are suitable. This distinction can make a significant difference in how members perceive the trustworthiness and integrity of not only their financial advisor, but credit union as well. 

Greater Fee Transparency
RIAs typically have a fee structure that is straightforward and easy for members to understand, such as a flat fee or a fee based on assets under management. This transparency in fees is congruent with the credit union's ethos of fair and honest dealings. On the other hand, third-party brokerages may have more complex fee structures, often involving commissions, which can lead to potential conflicts of interest and a lack of clarity for members.

Customized, Holistic Financial Advice 
RIAs are known for offering customized financial advice that considers the entire financial situation of a client. This holistic approach is well-suited for credit unions that seek to provide comprehensive solutions tailored to each member's unique needs and goals. In contrast, third-party brokerages may have a more product-centric approach, focusing on selling specific financial products rather than providing holistic advice. 

Alignment with Cooperative Business Model 
The RIA model's emphasis on client-centric service, education, and transparency aligns seamlessly with the cooperative principles of credit unions. This alignment fosters a cohesive strategy in offering financial services, reinforcing the credit union’s mission and values. In contrast, aligning with third-party brokerages can sometimes introduce a mismatch in values and priorities, potentially diluting the credit union's commitment to its members. 

Building Long-Term Member Relationships 
By adopting the RIA model, credit unions can deepen their relationships with members. The model allows for a more integrated financial service experience where members feel their credit union is truly looking out for their entire financial wellbeing. This contrasts with the often transactional nature of third-party brokerages, where the focus may be more on product sales than on building long-term, personal relationships. 

The RIA model's alignment with cooperative values, along with its focus on trust, transparency, and customized advice, makes it a superior choice for credit unions compared to third-party brokerage models. By adopting the RIA approach, credit unions can strengthen their commitment to their members, ensuring that their financial advice and services are fully in line with their core values and mission.

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Get In Touch!
Interested in offering a wealth management program to your membership or reviewing your current program? Please contact Michael McDermott, Head of Program Management at 708-487-1458 or email.