A quiet revolution in financial advice
Many people struggle to make sense of the financial part of their lives. Bank accounts, credit cards, debit cards, mortgages, car loans, student loans, retirement savings, education savings accounts, investing. We are bombarded by advertising that makes us feel like we are either not doing enough, doing it wrong, or stupid. It gets even more complicated when we are in relationships with others.
Most of us have not had any formal training about financial concepts. Even when we try to educate ourselves by reading articles or books, they all seem to come with a bias. The authors want you to sign up for their course or use their investment service or buy stocks online with their app.
Finding an Advisor
So, you decide to look for an advisor to help you. The term “Financial Advisor” is not regulated. It is used by 311,000 people in the United States alone. The term is used to describe various relationships between consumers and those who recommend or sell financial products and services. These people include stockbrokers, registered investment advisors, investment advisor representatives, insurance professionals, certified financial planners, chartered financial analysts, chartered financial consultants, personal financial specialists and chartered investment counselors along with others.
What about education?
About 75,000 of those 311,000 financial advisors are also Certified Financial Planners, a designation that requires coursework and testing similar to a graduate level course of study. Still fewer -- around 5,000 -- hold the CFA designation. Chartered Financial Analysts go deeper into the technical side of things like portfolio construction and will work either with the public or behind the scenes in an investment company. There are also certificates in some specific disciplines like insurance or retirement plans and anyone who gets paid for financial advice will have taken exams sponsored by the state to be allowed to conduct business.
Who do they work for?
What about who they work for? Most financial advisors work for either a registered investment advisor or a broker dealer. Broker dealers sell securities and other products and get paid a commission from the mutual fund company or the insurance company. RIA’s recommend securities and give advice in exchange for a fee directly from the client. Broker dealers often own an RIA so they too can offer advice and make recommendations for a fee from the client. Why does this matter?
Who do they really work for?
Does your advisor work for you or for the RIA or for the broker dealer? Or a better question, how do they get paid? Would you rather take advice from someone who you pay directly or from someone who gets paid by a third-party vendor of a product or a service? If your advisor gets paid by the mutual fund company or the insurance company will the advice they give be slanted in favor of mutual funds or insurance? As a general rule, it is better to get advice from someone you pay directly because there will be fewer conflicts of interest.
Are they a fiduciary?
RIA’s are required to be a fiduciary. This is a legal obligation to put the client’s interest first. Broker dealers are held to a lesser standard. Recent changes in the regulations will hold broker dealers to a higher standard when working with retirement accounts, but the standard of care is still less than a fiduciary one.
A reason to hope
There has never been a better time to be looking for a well-educated, fiduciary advisor. In the last 10 years or so there has been a quiet revolution in the RIA space. Advisors are starting small RIA’s to meet the growing demand for unbiased advice. People like Cheryl Garret of the Garret Planning Network and Michael Kitces and Alan Moore of XY Planning have created networks that support these independent advisors. Offering technology and compliance support along with the ability to network with other advisors, these networks are growing and filling the void.
As with anything new people are struggling with the best ways to deliver advice and charge for it. The dominant model is called the AUM model. The advisor charges a percentage of the assets they manage for you, typically 1%. There are many other models, such as hourly, subscription and retainer that are also gaining traction. It will be interesting to see which models are successful as this revolution plays out.
If you struggle with making better financial decisions, there is help out there. You just have to dig a little deeper and ask the right questions. In a later article we will explore what a financial advisor actually does and how much value they bring. The answers may surprise you.
