So you want a financial adviser. Maybe you want one to alleviate financial stress, or maybe you want one to help you with investing, either way you probably have no idea where to start. Who could blame you when there is so much confusing jargon used? Financial consultant. Agent. Registered Representative. Where do you even begin? This week in my column for the Indy Star I tackled this subject head on.
Let’s start at the beginning, what should you expect from a financial adviser?
A financial adviser should serve two functions:
1) Help you look for and evaluate investment opportunities.
2) Increase your net worth by helping you work toward financial wellness, which would be debt decreasing and savings and investments increasing.
These are the reasons you should hire a financial adviser, but there is still the question of who will be the right one for you. The financial planning industry has attempted to answer the question of how to hire a financial planner by making it one over compensation. This doesn’t work for a few reasons, the most important one being that if you don’t have copious amounts of money to invest you will be passed up by many advisers. This can get really confusing so let me breakdown a few of the different ways in which financial adviser’s are compensated.
“A commission-based adviser doesn’t charge fees, but instead is compensated by investment and insurance companies based upon selling their investments to consumers. And as crazy as this sounds, commission-based advisers have no industry-regulated responsibility to do what’s in the client’s best interest. This is called fiduciary responsibility, and commission-based advisers don’t have it. Is a commission-based adviser predestined to give you biased financial advice based potential commission rates? Arguably, but not always. Some experts argue that human nature prevents commission-based advisers from giving objective financial advice. I disagree.” (courtesy of the Indy Star)
“A fee-based adviser charges a fee to manage investment assets and can still accept commissions from insurance and investment companies. Whereas a fee-only adviser collects a fee for managing your money, but doesn’t accept any commission from third parties. The idea is to create an objective environment of fiduciary responsibility. However, the assertion that a fee-based or fee-only adviser is undeniably scrupulous is absurd. You do realize that speed limit signs aren’t suggestions, right? The main problem with this method is the imposition of “minimum assets” policies.” (courtesy of the Indy Star)
There are other ways that advisors are compensated but the point I want to make is this: compensation is only one factor in evaluating a financial adviser. Many industry types want to say one kind is better than the other, but again, how a financial adviser is compensated is only a piece of the whole picture.
But most importantly, wherever you quest to find a financial adviser takes you, you must do a broker check on them (BrokerCheck.FINRA.org). Although, just like compensation, a broker check is just another piece of the puzzle. I’ve given tips before on what qualities your financial adviser should have, which you can read here. Also, I’ve written a two part series (Part 1 and Part 2) on how to evaluate the performance of your financial adviser which is important to know once you’ve hired one. All in all, this is an important decision that shouldn’t be made lightly.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.