Financial Advisors: Not All The Same
Let’s say you’re nearing retirement and you need help planning Social Security and your investments to make sure you’ll have enough money to last throughout your lifetime. Or perhaps you’re already retired, having moved to Ashland from out of state, and you would like to have a local investment advisor. Or what if you have managed your investments on your own in the past but would now like professional management?
In any of these situations, how would you find a competent financial advisor? If you do some research on what you should look for in a financial advisor, you’ll find that experts in the field like Jane Bryant Quinn and Suze Orman, as well as publications like Forbes and the Wall Street Journal, typically recommend that you work with a fee only Certified Financial Planner Professional ™.
In the past, if you wanted to invest in stocks or mutual funds, you had to go through a stockbroker, who worked on commission. Brokers knew little or nothing about financial planning: that is, how to coordinate insurance, tax planning, retirement planning and estate planning. They were primarily salespeople. Then, in 1970’s, a movement to professionalize the industry began with the Certified Financial Planner designation. Certified Financial Planner Professionals™, as they are called, have taken five college-level courses on financial planning and investments, passed a rigorous two-day exam, abide by a code of ethics and must take continuing education courses to maintain their certification.
At about the same time the CFP® designation arose, brokers started to leave Wall Street firms to go independent by setting up Registered Investment Advisers. A Registered Investment Adviser (or RIA) is a company that gets paid directly by its clients for investment management, rather than through commissions on the sale of investment products. This model proved popular with consumers and RIA’s continue to grow.
To manage an investment account, RIA’s usually charge their clients a fee based on the percentage of the assets being managed. The average annual fee is around 1%, depending on the amount of assets under management. In this model, the investment advisor has an incentive to grow the client’s account(s), since the larger the account, the more the advisor gets paid. It also removes the conflict of interest inherent in the commission model, where the advisor has an incentive to sell products that pay the highest commissions. Note that RIA’s can also charge an hourly or flat rate, which is typically for financial planning.
Another important consideration is that RIA’s are required to act as fiduciaries for their clients, putting the interests of their clients ahead of their own. Believe it or not, commission-based advisors do not have to adhere to this standard.
What is confusing to consumers is that all of the national firms have now opened their own RIA’s, offering fee-based management in addition to selling products on commission. In this “hybrid” arrangement, the consumer is forced to ask which hat the advisor is wearing when he/she recommends an investment. The solution is to look for an Registered Investment Adviser firm which has no affiliation with a “broker-dealer” or any insurance companies. Only these firms can call themselves “fee only”.
So how do you find a fee only Certified Financial Planner Professional™? This easiest way is to go to the CFP Board’s website: http://www.letsmakeaplan.org/choose-a-cfp-professional/find-a-cfp-professional. Next to each advisor listed, check “Compensation Method”, looking for “Fee Only”. Of course, you’ll still want to interview any advisor listed to make sure they’re a good fit for you.