In light of the financial meltdown of 2008 and 2009, the financial community has seen a lot of damage to its reputation. It doesn't take much googling to find articles written by some well-respected media outlets calling into question the financial advising community.
Although it's understandable that the public would have a healthy dose of skepticism given the bailouts, Madoffs, and debit card fees, the financial advising community wants to move beyond the vilification. If you asked a financial advisor what they wish you knew about them, this is what they might tell you.
- Financial professionals cover many different aspects of financial health such as retirement, investing, and life planning.
- Financial representatives don't have the best reputation, but most of this is due to fee structuring. Talk through this part carefully with whoever you choose.
- Be sure you are choosing the right professional for the job.
- If possible, use a financial professional who has worked for someone you know in the past for an extended period of time. This speaks more to their style of business than almost anything else.
Not All the Same
The "term financial advisor" is similar to the designation "doctor," in that different types of advisors and doctors specialize in different areas. Some financial advisors are experts at planning your retirement, while others may excel at investing your portfolio for maximum gain.
If you want to know your magic retirement number, seek out a financial planner. If you want to position your estate for maximum tax advantages, find a tax attorney or estate planner, and if you want somebody to tell you the best way to invest your recent inheritance, an investment advisor is your best choice. Many advisors have overlapping skill sets, but if you have a complicated situation, a specialist is in your best interest.
Some financial planners are paid a flat or hourly fee for their services, while those who invest your money may be paid a yearly percentage of the number of assets they manage for you. Others are paid from the commissions made from recommending certain financial products.
Each type of compensation model has good and bad points, but the advisor who is paid on commission has a different motivation than somebody who gets paid more as they make you more money. You should have an idea of which model you're comfortable with before hiring an adviser.
Education Isn't the Same
Becoming a financial advisor doesn't require a degree and it's sometimes as easy as studying for a test. In contrast, some advisors go through grueling programs, like the certified financial planner (CFP) or the chartered financial analyst (CFA) program.
These programs require years of experience and a difficult curriculum that takes thousands of hours to complete. Some financial advisors have college degrees in finance, while others do not. Asking for an advisor's education and experience should be one of the first steps in picking an advisor.
Different Legal Responsibilities
Investment advisors have a fiduciary responsibility to their clients. This means that they are placed in a position of trust and, therefore, must put their client's needs ahead of their own. They should be making decisions and taking actions that assure their client is getting the best possible pricing and performance. For example, a financial advisor who has a fiduciary responsibility would have to make trades that benefited their clients before they could benefit themselves.
Broker-dealers operate under the suitability standard. The key difference is that a broker-dealer operating under the suitability standard is loyal to their company before their client. They still have to make recommendations that are suitable for the client, but they aren't under any obligation to put them first. That doesn't make advisors operating under this standard any less trustworthy, but it's important to know the difference.
Not All Rich
Financial advising is unique in the fact that advisors can only service so many clients. If they aren't commission-based and charge 1% of the assets under management, that's $1,000 on a $100,000 portfolio, but the average advisor doesn't have a practice full of $100,000 portfolios. The average salary range for most advisors is roughly $36,000 to $78,000. Like any career-oriented person, the advisors who offer outstanding service will be rewarded.