The Top 5 Things to Know About Independent Financial Advisors

Article By: Travis Maus, Chief Executive Officer

In a previous post, we asked if you are in pursuit of unbiased advice regarding your money and finances. Maybe you’ve been frustrated that, try as you might, you just keep having the same experience repeatedly with so-called financial advisors. You attend a meeting with a financial advisor who claims to be unbiased, only to find yourself in a pressure-cooker sales pitch.

You may have been told to find an “independent financial advisor.” Today, we share the top 5 things you need to know about independent financial advisors.

What does independent actually mean?

In the financial industry, the term “independence” references a non-captive relationship with a broker-dealer, investment, or insurance company. This means that the big corporations do not own the associated financial advisor’s business through which they place business. However, there are various levels of independence.

The terms hybrid or fee-based financial advisor refers to the independent financial advisor offering both fee and commission-oriented products. Since these products are actually brokered through broker-dealers, investment, or insurance companies, the so-called independent financial advisors will still be exposed to restrictions, requirements, and/or incentives based on production.

The term fee-only implies independence because this means the financial advisor should not be offering any commission-based products and, therefore, free of the contingencies mentioned above. However, many independent financial advisors will still utilize a corporate RIA (Registered Investment Advisor) firm to place their business through. When this happens, they also may find themselves in a situation where they are exposed to restrictions, requirements, and/or incentives based on production. 

If you are considering hiring an independent financial advisor, our advice is to make sure you understand and are comfortable with the level of their independence. If there are things that look like conflicts to you, ask them questions about how they manage the conflict and require the answer to be provided in writing. Email is acceptable

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What does financial advisor mean?

Just because someone is a doctor does not mean they are qualified to perform open-heart surgery. Similarly, just because someone refers to themselves as a financial advisor does not mean they are qualified to provide you with comprehensive financial and investment planning.

According to https://www.investopedia.com/terms/f/financial-advisor.asp, “Financial Advisor” is a generic term with no precise industry definition. As a result, this title can describe many different types of financial professionals. Stockbrokers, insurance agents, tax preparers, investment managers, and financial planners can all be considered financial advisors. Estate planners and bankers may also fall under this umbrella.

Your financial health plays a significant role in your physical and mental well-being. If you are considering hiring a financial advisor, our advice is to think of the endeavor as though you are hiring a financial doctor. Make sure you have a team of professionals with the competencies and specialties pertinent to your personal situation.

Beware of one-person teams.

As previously covered, the title of “financial advisor” is extremely vague. To add to this, the concept of independence means to stand alone. Not all independent financial advisors are one-person teams. Still, suppose you will get involved with any financial advisor, independent or not. In that case, it is in your best interest to ensure they have the appropriate level of support behind them.

 No one can be an expert on all things financial. When you hire someone to provide you with comprehensive or holistic financial planning and investment management, you should ask the financial advisor the following:

• What are your areas of specialty? (No one specializes in everything – if the financial advisor does not answer with some level of humility, consider interviewing someone else.)  
• For the areas that you do not specialize in, who helps me? (Many financial advisors work in silos and may be the only ones touching the client’s work. How will you get support in areas where they do not specialize?)
• If something happens to you, who on your team will step in to be my temporary or new financial advisor? (Consider the situation you would be in if something happened to your financial advisor – death, disability, retirement, etc. Good planners make sure there is a plan to deal with the crisis before one occurs.)
• Fiduciary. Fiduciary, and why credentials and years of experience can be misleading.

The most important thing to consider when hiring a financial advisor is the fiduciary level under which they are working. Is their responsibility limited? We often suggest stopping listening to what they say and start reading the paperwork you are signing. Credentials and education are also necessary because they signify that the financial advisor has had additional training.

However, the application of additional training and the level of fiduciary responsibility assumed by the financial advisor matter the most. It is common to see statements such as “over 100 years of combined experience” or “in business since 1950”. These claims are irrelevant to the quality of the services that you will be receiving. If it would be more beneficial to know:

• How many financial advisors make up the 100 years of combined experience, and what exactly is that experience?
• How many comprehensive financial plans do you work on annually?
• What types of financial situations do your financial planning clients tend to be in?
• How many hours, on average, does it take for you to provide comprehensive financial planning to a client?
• What planning areas do your financial plans cover?
• Are your financial planning engagements and fiduciary responsibilities open-ended, or do they just cover the time around the delivery of a written financial plan?

Regarding the “in business since…” example, the financial industry is one of the few where past results have very little relevance to future success. You are hiring a professional service that you expect to guide you through today’s financial, investment, tax, and legal issues and help prepare you for the future. A future that is changing fast and is full of uncertainty.

Experience with complex financial and investment issues is absolutely valuable, but the “in business since” statement should not be considered a testament to a financial advisor’s ability to guide you through such issues. The financial planning industry is young, and many pioneering firms are just turning over to the second generation of leadership. Many financial firms also originated from and are still primarily focused on investment product sales and/or management, not financial planning.

Consider asking:

• Is this an investment management firm that also offers financial planning, or is this a comprehensive financial planning firm that also provides professional investment management?
• How do you get paid for providing comprehensive financial planning?
• Can I just hire you for comprehensive financial planning without moving investments to your firm?

All financial advisors have bias, so take advantage of it.

The idea that there are unbiased financial advisors is laughable. Further, the idea that an independent financial advisor has a magic ability to avoid bias should be disregarded. Since all professionals are people, all professionals have biases. So, it is your job as the prospective client to discover, understand, and, if applicable, leverage a financial advisor’s biases to your benefit.

This might sound absurd but consider the following. Financial advisors may have many different biases, such as commissions, proprietary investments, or working on one-person teams. Some financial advisors are more forthcoming than others. At S.E.E.D., we are obsessed with financial planning and fiduciary principles. Our biases are:

1. 1. All clients should receive comprehensive financial planning before they get investment advice.
   2. All investment advice should be dictated by a client’s need(s) and based on methodical and prudent policies and procedures, upholding strict fiduciary principles.
   3. Those who want to work with a fiduciary for comprehensive financial planning should work with a fee-only financial advisor.

Therefore we believe any situation the contrary to our bias is not in a client’s best interest. At least you know what to expect if you work with us. Think of a financial advisor’s biases as an indication of their values. Make sure their values match up with what is important to you and your needs.

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Would you like to speak to our team of fiduciaries? We offer a no-cost, no-obligation first discovery meeting to learn if planning is appropriate for you. We have video-conferencing technology and are not limited geographically.

Wherever you are, if you need help, we can help you! Connect with us by filling out our form at www.seedpg.com/contact.

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