Rethink Your Financial Advisor

Updated September 2021

“Don’t you think we should have a financial advisor?”

This was a question I asked my husband several years back.  I was managing the day to day finances, and I was starting to feel that maybe we should have a professional look over what we were doing just to make sure we were on the right track.  Were we saving enough money?  Were we investing our money appropriately?  Surely finding the right financial advisor would put our minds at ease.

My husband replied with a comment that financial advisors could be pricey and had different ways of being compensated.  I was honestly too overwhelmed at the time to look into it any further, so the subject was dropped pretty quickly.  Life went on as usual.

Looking back, I’m actually glad that we didn’t find one because there’s a possibility that we would have regretted that decision.

Now, I’m NOT saying that no one should have a financial advisor.  There are many people that absolutely love their financial advisor and place a lot of trust in the decisions that they make for them.  But as with many life choices, it’s always a good idea to do a little research before making that commitment.  Choosing our financial advisor because he happens to be a friend of a friend is not good enough.  We are tasking these financial advisors with our own hard earned money, and we are compensating them for their expertise in this subject.  What you may not know is if they are actually the best fit for your financial goals.

THE ALPHABET SOUP OF THE FINANCE WORLD

But first, who exactly is a financial advisor?  What sort of training and certification did they have to go through to get that title?  For a veterinarian, seeing the letters “DVM” or “VMD” after their name gives us confidence that the individual graduated from an accredited school and went through a rigorous program in order to earn those letters.

However, did you know that there is no equivalent degree or certification for someone who calls themselves a financial advisor?  Anyone can actually make a business card and just claim that they are a financial advisor since there is virtually no regulation overseeing this designation.  In fact, they could also just call themselves a financial planner, a wealth manager, a financial consultant, or a plethora of other names since many of these titles don’t require any special licensing.

So your financial advisor happens to have a number of acronyms after his/her name. This gives you some relief, but you actually have no idea what those acronyms mean.  To save you time, here is a short list of designations that are considered to have the most rigorous training and testing requirements:

1. Certified Financial Planner (CFP®): Requirements include a bachelor’s degree, 3 years of full time work experience (or 2 years in an apprenticeship), completing a program of study, and passing a certification exam consisting of 170 multiple choice questions.
2. Chartered Financial Analyst (CFA): Requirements include a bachelor’s degree, 4 years of work experience, and passing a total of three exams.
3. Certified Public Accountant (CPA): Requirements differ by state, but usually require 150 semester hours (most bachelor’s degrees require 120 hours) and passing the Uniform CPA Exam.
4. Chartered Financial Consultant (ChFC): Requirements include completing 9 courses offered by The American College, passing an exam after each of these courses, as well as 3 years of work experience

Apparently, there are over 100 designations that you can find through FINRA (Financial Industry Regulatory Authority).  This is a self regulated organization that keeps tabs on members within the financial industry.  You can easily perform a background check on your financial advisor and check their employment history, credentials, complaint history, etc.

No wonder people get confused about the financial industry and who to turn to for help.  Can you imagine trying to find the right person to treat your pet if there were over 100 degrees certified for the practice of veterinary medicine?

THE IMPORTANCE OF A FIDUCIARY

So you check up on your advisor and everything looks clean.  You’re done, right?

Well, think about WHY you’re hiring a financial advisor.  Even if they happen to possess all of the knowledge and expertise in the world when it comes to investments, taxes, retirement, etc, what matters even more is if they are using this knowledge to benefit you and your specific situation.  This is where you need to understand the concept of an advisor acting as a fiduciary.  Essentially, a fiduciary is someone who is looking out for your best interest ahead of their own.

But isn’t my financial advisor doing that already?  He’s such a nice guy- he would never rip me off!

Well, what if this advisor works for a certain brokerage firm and is being handsomely compensated for selling you a life insurance product? And because he works for this one firm, he’s not allowed to sell you life insurance products from any other company, even if they are a better fit for you?  Or maybe you don’t actually need this product at all, considering that you could have put your money to better use elsewhere in your portfolio?

Or perhaps he puts your investments in Fund XYZ, and you had no idea that this fund is actually costing you quite a bit more than other similar funds because he gets a kickback and is being incentivized to sell Fund XYZ?

Ah yes….this is where conflict of interest comes into play.

HOW THESE ADVISORS GET PAID

So how exactly are financial advisors compensated?

1. Commissions: If you are buying any financial or insurance products, they will receive a portion as commission.  These include securities transactions (buying/selling stocks), mutual fund fees (front end loads, back end loads, 12b-1 fees, etc), and insurance products (life, disability).
2. Percentage of assets under management (AUM): They take a certain percentage, usually around 1%, of the total amount of assets they are managing.  Let’s say they are overseeing $100,00 that you have in your retirement account.  They are getting paid around $1,000 to manage that account on an annual basis.  Spread this out over many years, and you can see that the numbers can add up.
3. Hourly Rate or a flat fee/retainer: This method of payment is for those who are looking for advice or need a certain project done.  Think of this as your office visit fee- you are providing advice at a fixed rate and your client will decide whether or not they will pay for further services based on that advice.

FEE-ONLY OR FEE-BASED….WHAT’S THE DIFFERENCE?

These two terms sound so similar and are easily confused, so make sure you know the difference between the two.

Fee-only refers to an advisor that receives a fee for services that do not rely on selling any products.

Fee-based refers to an advisor that is compensated by selling you something and receiving a commission.

OK, SO NOW WHAT DO I DO?

If you have a financial advisor and all of this is new information to you, do the following:

1. Check FINRA to see if your financial advisor is registered.  If so, do a background check.
2. Ask your financial advisor if they are acting as your fiduciary.
3. Ask your financial advisor how they are being compensated.  Are they fee-only or fee-based?
4. Be honest and ask yourself if you are 100% happy with the work your advisor is doing for you. If not, or if you still feel lost with your finances despite having hired a professional, then look elsewhere (btw- this is where I can come in and help as an accredited financial counselor)!
5. Educate yourself about financial matters.  A better informed client will work as a team with their financial advisor, rather than a passive participant.

Following these steps will give you peace of mind that you are putting your finances in the right hands.  It will also force you to evaluate if you are comfortable with how your financial advisor is compensated.  Your financial planning needs will change over time, and if you plan on having a long term relationship with your financial advisor, make sure you do your homework so that you don’t regret your decision.

Do you have a financial advisor?  Were they upfront with their fiduciary status and how they were being compensated? Comment below!