May Friday Focus – Pulling the Curtain on Financial Advisors

The term “financial advisor” encompasses a wide array of professionals, each with varying specialties and qualifications. From stockbrokers to certified financial planners (CFPs) and investment advisor representatives (IARs), the landscape is diverse. It’s crucial to recognize that not all financial advisors operate under the same standards. For instance, while CFPs and IARs often adhere to fiduciary standards, ensuring they prioritize their client’s best interests, others may operate under suitability standards. These differences can significantly impact the advice and services they provide.

To better understand the nuances of financial advising, it’s essential to grasp the different license types and the standards they adhere to. Registered representatives, typically associated with brokerage firms, normally abide by a suitability standard over fiduciary duty. On the other hand, CFPs and IARs, are held to higher fiduciary standards. This distinction is critical, as it influences the recommendations and actions taken by advisors. Additionally, some insurance agents, may also be classified as financial advisors, play a role in certain financial strategies, especially concerning “green money” or insurance-based products.

One of the most common points of confusion for individuals seeking financial advice is understanding how advisors are compensated. Fee-only, fee-based, and commission-based structures each have their own implications and considerations.Fee-only advisors charge clients directly for their services, often based on a flat fee (or fee for a plan) or a percentage of assets under management. This model is transparent and eliminates potential conflicts of interest associated with commissions.Fee-based advisors receive some of their income from fees paid by the client or as a percent of assets, but could also receive commissions or compensation from their brokerage company, mutual fund families, or insurance companies. While there are areas of concern with this, there are also very appropriate uses of this model.

Concern – an advisor is paid more by using certain fund families. American Funds is a great example of this, often incentivizing advisors or brokerage firms to use their funds. But that doesn’t mean that is always the best solution for you.

Benefit- an advisor who works with both red and green money. There are many times when both red and green money should be part of a portfolio, but green money is only commission-based. (click here to learn about the colors of money)

Commission-based advisors earn compensation through the sale of financial products, such as insurance policies or annuities.

Bottom line – when working with red only money, fees and commissions can blurry the waters, a fee-only advisor is more transparent. However, if some green money is also desired or part of the plan, then that portion is always paid through commissions. Transparency from your advisor on how they are paid is important.

Finding the Right Fit:

With the plethora of financial advisors available, finding the right fit for your unique needs can be daunting. Asking the right questions and understanding an advisor’s process and expertise is paramount. Consider inquiring about their experience working with clients in similar life stages or financial situations. Understanding their investment philosophy, risk management strategies, and approach to financial planning can provide insight into their suitability for your needs. Moreover, clarity on fee structures and potential conflicts of interest ensures transparency and fosters trust between clients and advisors.

Navigating the realm of financial advisors requires diligence and discernment. By understanding the various license types, fee structures, and standards of practice, individuals can make informed decisions when selecting an advisor. Whether seeking assistance with retirement planning, investment management, or estate planning, finding the right advisor is crucial for achieving financial goals and securing peace of mind. Remember, clarity, transparency, and alignment with your objectives are key when embarking on this journey of financial partnership.

Bonus – Questions to Ask a Financial Advisor

If answers are not clear or easy to understand, if there are more financial jargon and unrelated stories than real answers, that is a cause for caution.

1) Who are your main clients? What do you specialize in?

2) What ongoing, professional training do you take in financial and retirement planning?

3) How are you paid?

4) How do you stay current on key investment products, tools, and new retirement plan tax and distribution rules?

5) What are my best investment choices? How do you determine the best options for me?

6) How do you take the tax consequences into account for my investments?

7) What are key events that would trigger a need to review my total financial picture?

8) Who do you turn to when you have questions on financial, legal, or tax matters? (No one can know it all.)

9) Do you have someone in place to implement my wealth accumulation and retirement distribution plan if something happens to you? Who?

Please feel free to ask us any and all of these questions!

If you’d like to schedule a personal one-on-one call with Michelle, click HERE to access Michelle’s calendar and schedule a day and time that is convenient for you.

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