Advisor or Salesperson:
With thousands of individuals calling themselves “financial advisor” or “wealth manager” or “investment specialist”, the challenge for investors is to wade through the marketing and advertising to be able to identify those financial professionals who truly put their client’s interests first. The financial services arena is vast and very fragmented among a number of different types of advisory models. Many advisor-types work for a financial institution, such as a bank, a stockbrokerage firm or an independent broker-dealer and are paid by their company to sell certain products and services. Other advisors have no allegiance to a company and are paid directly by their clients. Investors need to be able to determine which type of advisor is most likely to provide conflict-free investment advice.
Should You Pay Commissions or Fees?
Advisors who work for an investment firm, stockbrokerage firm, or a bank earn their income primarily through commissions paid by their company that generates its revenue from the sale of products and services. The more products an advisor sells, the more income he or she earns, and the more revenue the company generates. While these advisors must adhere to certain standards of “suitability” when recommending investment products, they are not required to place their client’s interests first as the “fiduciary standard” requires. Although most of these advisors have the best intentions of doing what’s right for their clients, they often come under pressure from their firms to produce a certain amount of revenue. This can be conflicting for advisors and drive them to recommend products that they otherwise wouldn’t in particular situations.
At the other end of the spectrum are advisors whose sole source of income are fees paid to them directly by their clients. They work directly for their clients and have a fiduciary responsibility to do only what is in the client’s best interest. They can search the whole universe of financial products to find the ones that are most appropriate for their clients. Because they don’t receive any commissions or fees from product sales, they can be completely objective in their advice.
Professional Guidance or Sales Process
Both commission-based advisors and fee-only advisors work with their clients through some sort of investment planning. Investors should never consider a recommendation unless their advisor has worked through the process of thoroughly understanding their financial situation, specific objectives, and conducting a thorough risk assessment. Investors need to be able to discern whether the analysis performed by their advisor is truly a financial map for achieving their objectives or simply a justification for a product recommendation. One key test would be to ask your advisor after a product has been recommended whether there is an equivalent investment product available that has fewer expenses or smaller fees. If they say no or hesitate, you may be in front of a product salesperson.
Background and Experience
It is important to treat the selection of an investment advisor much like the hiring of an employee. The right kind of advisor does work for you. Because your financial future is at stake, you need to ensure your advisor possesses a solid background and substantial experience for working with people in your specific situation. Advisors who have not experienced at least one complete investment or financial market cycle (generally, about five to ten years) may not be seasoned enough. The more experience the better as long as it has been gathered working with people in situations similar to yours.
