So you've decided to hire an investment advisor or financial planner and now you want to know which type of advisor is best for you. First and foremost, congratulations on taking a step toward true financial independence by deciding to delegate some of the responsibility onto a hired financial professional. Now all the remains is the challenging part -- finding an advisor that is both knowledgeable and one that will keep your best interests at heart and in mind.
How Investment Advisors and Financial Planners Get Paid
The most expensive advice is free advice. Although this statement is often delivered as a joke, there is much truth to it: Like everyone else, professional advisors and planners need to pay the bills and put food on the table at home. Therefore, even if the fees may not be coming directly out of your pocket, and even if you can't see clearly how they're getting paid, advisors are getting paid by you in some shape or form. Here are the basic ways advisors get paid:
- Commissions: This type of payment is typical of full-service brokers, which are the traditional "stockbrokers." A commission, which can range from $30 to $300 or more, is paid to the broker whenever they execute a trade (buy or sell shares of investments). The commission works like a fee added to the client's trade amount. For example, if the trade is to buy $10,000 in shares of a particular stock, and the commission is $100, the total trade that you bought is $10,100.
- Fees: Some advisors don't get paid commissions but rather charge fees directly to the client based on the services provided. Some advisors will charge fees based on assets under management (AUM) or they charge a one-time fixed fee for the type of service. For example, an advisor might charge a 1.00% AUM fee. If the client's assets under management are $100,000, the annual fee would be $1,000. But if the client simply wants a one-time financial plan, the advisor will charge a fee that is disclosed in advance. For this type of service, a client may pay $500 to $5,000, depending upon the depth and complexity of the plan.
- Salary Plus Commission: Many advisors, usually those found at banks and insurance companies, get a base salary and they also get commissions or bonuses based on the products they sell.
Types of Investment Advisors and Financial Planners
There are several different types of advisors with various titles, designations, and certifications but here are the ones to know:
- Certified Financial Planners (CFP): A CFP® is an individual who has met all of the Certified Financial Planner Board of Standards' requirements, which includes a minimum of experience and passing a comprehensive board exam. CFPs also have to complete continuing education requirements to maintain their CFP status. CFPs can have a broad knowledge of all areas of financial planning, including investing, retirement, insurance, taxes, insurance, and estate planning. However, the CFP designation does not guarantee that they are an expert in any certain area, although they typically specialize in one of the areas of financial planning. Generally, and at a minimum, the CFP designation indicates at least a high relative understanding of financial products.
- Registered Investment Advisers (RIAs): An RIA is a firm that is registered with a State regulatory body, such as the Securities division of the state's Attorney General's office, or the Securities Exchange Commission (SEC).An adviser (with an "er") is a company and an advisor (with an "or") is an individual, formally called an RIA rep.
- Stock Brokers: These advisors, usually referred to as "full-service brokers" are representatives of a brokerage firm that is licensed to sell securities (i.e. stocks and bonds). These advisors typically get paid by commissions on the securities they sell. They are called "full service" because they (as well as the brokerage firm analysts) do all of the trading, advising, and analysis for the client. Commissions or fees coming from mutual funds commonly come from load funds and 12b-1 fees. Most do-it-yourself investors use "discount brokers," such as Charles Schwab, which will not typically place the buy or sell orders but will execute the trades for a small commission, usually around $10. Discount brokers also provide access to no-load mutual funds.
- Insurance Agents and Bankers: I put these two types of advisors into the same category because they are neither investment advisors nor financial planners but they can be licensed to sell mutual funds, stocks, bonds, and/or variable annuities that can be used as investments. Insurance and Bankers can also provide financial planning services.
What Type of Investment Advisor is Best For You?
To determine the best advisor, you begin with determining how much and what kind of services you need. If you only need guidance on investing, some basic advice, and your needs are not complex, you may benefit by using a brokerage firm like Edward Jones. They get paid commissions but they are usually reasonable.
But be aware that brokers are only required to uphold what is called a suitability standard of care, which means that they are required to recommend and sell investment types that are suitable for the client and the client's goals. However, it should be noted that brokers are not legally required to find the best or lowest-cost investment types for the client. Also, brokers like this usually recommend load funds or funds with expense ratios that are higher than necessary to accomplish the client's goals.
If you want investment advice and ongoing financial planning, your best bet might be a Registered Investment Adviser. RIAs only get paid by the client (you) and they only use investments (i.e. no-load mutual funds, low-cost index funds, and ETFs) that best serve the client's needs.
RIAs are required to uphold a fiduciary standard of care, which is more expansive than the broker's suitability standard. In different words, an RIA is legally required to put the interests of the client ahead of his or her own. You'll pay ongoing fees but the fees will come from you and a good RIA can save on expenses with low-cost mutual funds, which are often the best-performing funds.
In the opinion, the personal and professional experience of your humble mutual funds expert, insurance, and banks are not the best places to get investment advice. While some are capable, it is generally best to get your insurance products from insurance companies and your banking products and services from banks. On a lighter note, you wouldn't buy hamburgers from a pizza place, would you?
On a final note, whatever advisor or planner you use, it is wise to use one with a certification, such as a CFP (see above) or similar. You are also wise to ask friends or co-workers for references and to ask the advisor for references before hiring them.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.