Not All Financial Advisors are Created Equally
By Peter Rizzo
Every day we have clients referred to us by different investment advisors and in our conversation with the advisor they are frustrated by the investment sales people who masquerade as advisors but are only looking for the biggest commission rather than your financial wellbeing. Many of you use financial advisors and are extremely happy with them, but if you are shopping around, here are some things to consider:
Some advisors are simply salesmen, looking to upsell clients to get a better commission. Ideally, you’d go to a fee-only advisor who must adhere to the “fiduciary standard”: simply put, these advisors are required to act solely in the client’s best interest when giving them financial advice.
Some of these fiduciaries may have areas of specialty—for example, a Registered Investment Advisor will advise on your investments, not necessarily on all aspects of your financial life. Certified Financial Planners (CFPs, which are certified by the Certified Financial Planner Board of Standards), on the other hand, can likely help you create a comprehensive financial strategy involving things ranging from saving and investing to insurance, taxes, retirement, and estate planning. They must disclose any potential conflicts to clients before and while making advisements and will also disclose how they’re compensated.
Broker-dealers and “fee-based” advisors are who you need to watch out for. These professionals are held to a “suitability” standard, which means they may try to sell you an investment product that could be just fine for your needs but comes with extra fees attached when compared to similar products. It may not be the best product for you, but it’s suitable, and gets them a commission. These products could result in lower returns, and the higher fees can eat up your money over the years. The White House’s Council on Economic Advisers found that these advisors cost retirement investors $17 billion per year. You can read the report here DOL Report
Then there are robo-advisors, which manage your portfolio with algorithms and charge lower fees than a human advisor.
How to Hire a Financial Planner
You can check out the Financial Planning Association and the National Association of Personal Financial Advisors to search for planners. “There is no ‘typical rate’ for fee-only advisors,” says Jacqueline O’Reilly, NAPFA’s marketing and communications manager. “They all have different fees and it would depend upon your needs and which advisor you choose.” They may charge a percentage of assets under management (typically how wealthier investors are billed), by the hour, a flat rate, or some combination of the three.
It’s important to note that many financial advisors are only interested in servicing “mass affluent” clients, or those with at least $250,000 in assets. That’s why robo-advisors have been hyped so much in recent years—they’re cheaper, and some, like Betterment, don’t require an account minimum.
You could also check out the Garrett Planning Network, which was designed with the 99% in mind. There, you’ll find fee-only advisors who provide advice without taking the size of your accounts into consideration, and charge by the hour.
When hiring an advisor, the Securities and Exchange Commission recommends asking the following questions:
- What experience do you have, especially with people in my circumstances?
- What licenses do you hold? Are you registered with the SEC, a state, or the Financial Industry Regulatory Authority (FINRA )?
- What products and services do you offer?
- Can you only recommend a limited number of products or services to me? If so, why?
- How are you paid for your services? What is your usual hourly rate, flat fee, or commission?
- Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
According to NAPFa, these are the fees to be mindful of:
- 12b(1) Fee: An annual marketing or distribution fee associated with mutual funds.
- Surrender Charge: An amount deducted from the balance in your annuity policy or insurance contract if the policy is cashed in or surrendered early.
- Back-End Fee: An amount deducted from the balance in your investment if the investment is sold early. Often associated with selling mutual fund shares.
- Wrap Fee: A charge levied by an investment manager to a client for providing a bundle of services, such as investment advice, investment research or brokerage services.
- Performance Compensation: Compensation is contingent on reaching certain performance objectives. For example, if the investment earns 10 percent, the planner or planning firm may earn .5 percent, but if the investment earns 20 percent, the planner or planning firm may earn 3 percent.
Ultimately, if you decide to hire a financial advisor, you should ask upfront what their fees are and how they get paid. And if they aren’t fiduciaries, be mindful that they may not be selling you the products that are best for you.