Working With a Financial Adviser: Whom Do You Trust?

This is a new series on finding, selecting, and working with financial advisers and planners. A few days ago, a friend asked me on Twitter whether I had any articles on this topic. While I had a few old posts marginally related to financial advisory, I didn’t have anything in-depth.

People consider working with financial advisers for a variety of reasons. Some individuals are aware that in the near future they will be receiving more money than they are accustomed to dealing with. Some are having financial difficulty and want to work on a solution. Others are looking for an expert to help them confirm the decisions they’ve made are valid when planning for their future. Even more are preparing for an upcoming life change and are looking for guidance about what financials issues they should be concerned with. Some customers of financial advisers want someone to manage their investments.

Financial advisers come in different flavors, and it’s important to make sure once you start looking at your choices that you’re looking at the right group of professionals. Some of these professionals focus on selling investments and insurance, while doling out financial advice as they go about their sales pitch. Others have a role just to advise, providing you the information that is in your best interest, while leaving the final decisions up to you.

• Investment and insurance salespeople are often called financial advisers, but can also be called brokers, insurance agents, financial managers, and investment advisors. Walk into any major bank branch and they might have a few on staff. They will offer financial advice, but they will steer you towards their company’s products and other products for which they receive commissions.
• Financial planners fall into another category of financial advisers. Their goal is to help you make decisions, and they will help you evaluate at your entire financial picture, not just your investments. They often, but not always, carry a designation from the Certified Financial Planner Board of Standards, Inc. A future article in this series covers this designation and others.
• Asset managers are also called investment managers, wealth managers, wealth advisers, or registered investment advisors. You hand them your money and sit back. They may not call themselves financial advisers, but they’re worth noting to help alleviate confusion. Asset managers will make investments for you — and if you have enough money, they might include your funds on investment opportunities not typically available to the public. They could have a focus, like private equity or hedge funds, or they could place your investments in index funds — something you could do on your own.

With the last group of professionals, you take your money out of its current investments and turn them over to your investment manager. Asset managers usually take a percentage of your assets, such as 1% or 2%, each year. If you’re just looking for financial advisement, this is not the approach to take. You’ll want to work with someone in the second category above. The key word to look for is “fiduciary;” this is the requirement of a financial adviser to base their advice only on what’s best for their clients, not what will earn them most money through commissions.

Not all who call themselves financial advisers have fiduciary responsibility. Some have suitability responsibility, which means that their advice needs to meet a lower standard — their suggestions need to be an appropriate choice, but not necessarily the best choice. it’s important to determine whether the professional with whom you plan to work has fiduciary responsibility.

It’s best to avoid commissions-based advisers completely. Salespeople work on commissions. Financial advisers who have your best interests in mind usually work on a fee basis — perhaps an hourly fee, a flat fee for each session, or if you have a short-term need, a fee for one project. Rates of $100 to $250 an hour are not uncommon, and your geographic area will strongly influence your rate. If you foresee a long-term relationship with an adviser, some may prefer to be on retainer. Some financial advisers also charge a percentage of your assets, but there is an increasing trend to work with “fee-only” planners, who limit their fees to a flat rate.

Even though a financial adviser or planner can have a fiduciary responsibility to you, the individual who cares the most about your financial situation is you. No one else can fully understand and appreciate your life’s particular situation. While you can do well by working with an effective financial professional, whether or not you succeed with your financial goals is mostly up to you. Even financial planners have something to sell, so keep this in mind when approaching your discussions with a professional.

Next article in this series: Demystifying Financial Adviser Certifications.