Something I’ve noticed lately through conversations with prospective clients is that many people believe that all financial advisors (and people who give any sort of financial guidance/advice) are the same and that they basically do the same things.
I completely understand why people think this. There are many different titles like financial advisor, financial planner, financial counselor, financial consultant, investment advisor, investment consultant, investment counselor, the list goes on and on but one thing is clear, these titles are confusing and aren’t very clear on what the result is. I’ll be using the term “financial advisor” in this article as an umbrella term for those who give financial advice.
Most consumers believe that all financial advisors are essentially the same and they aren’t aware of the important differences and distinctions that they should look out for and what they should ask when interviewing financial advisors. There are some key differences that you should be aware of so that you can find the best financial advisor for you.
- What is their compensation model?
It is important to understand the difference in the way that financial advisors are licensed because that impacts how they’re compensated. The way someone makes their money directly impacts the kind of advice they give. There are 3 different compensation models for financial advisors:
- Fee only
- Commission only
- Fee based
Fee only advisors are paid only by the client. That means that they are not earning any sort of commission from a given company for recommending a particular product to their clients.
Commission only advisors don’t take payment directly from clients, but instead are paid by the company whose products they are recommending. Naturally, a financial advisor who works on this compensation model has a vested interest in recommending particular products/strategies to you even if they may not be the best fit.
Fee based advisors work on a combination of fees paid by the client and commission from companies for selling you certain products. Remember, there is a big difference between fee only(advisors paid only by the client) and fee based (advisors paid both by the client and by companies for selling their products) even though the terms sound very similar.
The compensation model that any given advisor works on can change the advice you get from them and the direction they point you in because they may or may not have a vested interest in pointing you in that direction.
- Who do they work for?
It is important to know whether an advisor chooses to work as an independent advisor or if they work under/for a larger company or brand. Independant advisors have more freedom in their recommendations because there is nobody above them giving them direction on what they can/can’t offer or what their managers would prefer them to offer.
A company could direct their advisors to recommend a specific product because it’s better for the client, or it could be that it’s better for the company and their compensation is tied to it.
That’s why it’s important to know if the advisor that you’re interviewing is a fiduciary or not. I am a fiduciary and that means that I am legally obliged to act in your best interest. I’d recommend asking any advisor that you’re considering working with if they are a fiduciary or not because it dramatically changes the relationship and what you can expect from them.
- How do they approach the way they give advice?
There is a spectrum of the way advisors approach giving financial advice. At one end is a product-centric approach where the advisor begins with a pre-defined suite of products that they’re most likely to steer you to and don’t deviate from this very much at all.
At the other end of the spectrum is someone who uses a process-centric approach and this is the approach I employ with my clients. This type of advisor begins without any pre-defined products or advice. That doesn’t mean they don’t believe that certain products or strategies are better than others, but they don’t begin their advice-giving process from that basis.
Instead, there is a process involved in coming to the conclusions that is wholly client-centered. This approach is not about about the advisor, it’s about the client and their individual needs. This sort of advisor starts by uncovering and understanding the financial goals, unique strengths, opportunities, and financial situation of their client. Only after uncovering that do they determine and suggest the best strategies and products for implementation that solve the client’s unique problems and goals.
Having an understanding of these 3 questions will help you determine what kind of an advisor you want and now you’ll be able to ask the right questions to see if any given advisor is right for you.
If you’re looking for a financial advisor that is a fiduciary and has a process-centric approach, click here to schedule a complimentary consultation to find out how I can help you.