Can You Trust Your Financial Advisor? Or Anyone?
After the financial crash and the Great Recession, people seemed to become even more wary than they were before of people in the financial industry. And that’s not without reason. But it’s important to understand whether you can trust financial advisors and stockbrokers, as some of these people may be helpful in your journey towards financial independence. So let’s tackle this fraught question here.
Financial Advisor vs. Stockbroker
Financial advisors and stockbrokers often get conflated. But, actually, they aren’t at all the same thing. Even though they can both advise you on investments and may even have some of the same educational background, financial advisors and stockbrokers aren’t the same thing.
The main difference is this: advisors give partial advice based on your best interests, and brokers sell products as a third party.
That’s a huge difference!
Financial advisors are, in fact, legally required to put their clients’ interests ahead of their own. Brokers also cannot legally advertise themselves as investment advisors. Because that’s not what they are, and they’re allowed to work in their own interests rather than yours.
Of course, this doesn’t mean that everything a broker says is terrible financial advice. Sometimes your interests happen to align with their own. But it does mean that you cannot take a broker’s advice on investing options as what’s necessarily in your best interest.
And on the other side of that equation, your financial advisor may not always be right. They have to tell you what they, in good conscience, think is best for you as the client. But that doesn’t mean they’re always right or always good at their jobs. Sometimes you can get terrible advice from a well-meaning financial advisor.
Another Major Difference
The same law that prevents brokers from saying they are financial advisors also defines what they are. They are legally people who are engaged in effecting trades of securities for individuals. This means that they have to actually do the trading.
So a broker will sell you a financial product and also do the trading on behalf of the customer, typically for a flat fee.
With all this said, brokers and financial advisors do some things that are similar. For instance, advisors do sell their services for a fee. They have to make a living somehow. Sometimes this fee is a percentage of your assets annually, or sometimes it’s a per-service or hourly rate.
And on the other side, a good broker will work to get a full picture of your financial life. They are earning a commission, and it’s in their interest to do a good job for you so that you keep coming back to them for more deals. And some brokers can offer wrap accounts, which charge a flat fee–more like an advisor–for trading with the idea that it’ll reduce unnecessary trading by the broker just to collect more per-trade fees.
Financial Planner vs. Investment Advisor
We’ve been using the term financial advisor so far. But the fact is that there are different types of financial advisors, certified in different ways. And many advisors have different specialties.
For instance, a Certified Financial Planner is likely to offer investing advice. But it will more likely be in the context of a much broader conversation about your finances and your goals. These individuals can help with things like planning your future estate, helping you make a plan to pay off debt, or looking at your overall retirement savings picture.
An investment advisor can have several different certifications, which we’ll talk more about shortly. But they may focus more heavily on the investment piece of your portfolio and make specific recommendations for how to invest, rebalance your portfolio, and more. But they aren’t a broker, so they won’t do the actual trading for you, and they don’t get commission when you buy into certain trades.
Beware the Broker
All of this goes to say that you need to be wary when dealing with stockbrokers directly. These individuals are essentially salespeople. Even if they don’t exclusively offer you investment options from their own company, they aren’t necessarily giving you the best recommendations for your needs. And they could still be getting kickbacks for selling other companies’ products.
Your best bet rather than working with an expensive broker is likely to be using an investing tool like Ally Invest or Betterment. These companies are low-cost online brokerages where you can complete your own trades for a much lower fee. Often, these companies charge a flat annual fee based on your account balance. And you can tap into financial advice through these online brokerages for a relatively low fee.
With options like these, you can make your own trades if that interests you. Or you can decide to invest in an account that will keep your investments balanced on your behalf. This is more expensive than executing your own trades, most of the time, but it’s cheaper than working with a personal broker to manage your money.
Why You Might Work with a Financial Advisor
As mentioned above, financial advisors or planners have a much broader scope, most of the time, than just your investment accounts. They can look at your full financial picture to give you direction and help in making big decisions. A planner might help you figure out how to pay for your child’s college education while also saving for your own retirement. And they can generally ensure that you’re on track for saving for retirement, have the right insurance coverage, and more.
Working with a financial advisor can be a long-term thing. You might have one person that you meet with annually to review your finances and make adjustments for the future. You could also work with someone more often than this if you have a lot of assets or a complicated financial picture. But for many of us, we’ll just call in a financial advisor when we need some extra help sorting things out.
Regardless of your current financial situation or level of need, chances are there’s a financial advisor out there that can help you sort through it. The key is to find one that you can actually trust. Next, we’ll talk about how to do that.
How to Hire an Advisor You Can Trust
Typically people are most motivated to make decisions that benefit them the most. That makes sense to most of us. But what if people are compelled by law to make decisions based on the best interests of others. That creates a tricky situation sometimes. A financial advisor might think they’re working in your best interests, but it can be difficult to even the most astute of humans to sort through their true, underlying motivations.
That’s why you want to be particularly careful when you’re choosing a financial advisor to work with. Here are some things to look for in an advisor:
- The Title: Look for a title that comes with a verifiable certification from somewhere like FINRA or Let’s Make a Plan. Don’t be afraid to actually verify that these credentials are up-to-date, as well.
- Ask About Legal Requirements: You can and should ask an advisor outright if they are legally obligated to act in your own best interests. You can even double check that their contract includes this type of language.
- Consider Conflicts of Interest: Even the most well-meaning advisors can have conflicts of interest at times. Ask your planner to disclose any potential conflicts of interest in writing and up front before you sign a contract.
- Ask About Compensation: This is perhaps the most important question. Ask the advisor exactly how they are compensated for their work. If they simply make what you’re paying them to manage your portfolio or give advice, that’s a good sign. It means they are more likely to actually work in your interests because when you prosper, so do they. But if they get compensation from commissions on any insurance, investing, or other financial products, take a second look.
Finally, you can, of course, effectively hire yourself as your own financial planner. If you’re making very complicated decisions, this may not be the best route. But if you just want to make a general plan for getting out of debt, saving for retirement, or paying for college, you might be able to do that with the resources at your fingertips (like this blog).
Deciding whether or not to hire a financial advisor, then, becomes more of a cost-benefit analysis. Can they help you more efficiently understand your options and execute good financial decisions? Then they might be worth the cost. But if you have time on your hands to research financial options and make your own decisions, save the money and give that a try.