About a month ago, I grabbed dinner with a friend to catch up on all the recent events in our lives. One of the topics she brought up was recently meeting with a financial advisor that was recommended by a work colleague. I informed her that I actually had also recently met with one, as he had been attempting to recruit new clients and offered a free consultation. We both shared our overall experiences and at some point she mentioned that her financial advisor was affiliated with a particular company. I laughed and responded mine was affiliated with that same one. I then proceeded to describe the specific recommendations he made and funny enough, her advisor recommended the exact same things to her. How is that two different people, with completely different professions, employment statuses (self-employed vs employee), and financial goals and desires had the exact same recommendations? It became clear that the advisors were selling a product, not individualized advice, yet they knew exactly how to twist the information to make it seem attractive for both of our scenarios.
Types of Financial Advisors
Financial advisors can be extremely instrumental in helping you manage your finances at all life stages. Whether it’s related to tax advantaged investments, planning for children’s college tuition, portfolio allocations, or even retirement withdrawal calculations, financial advisors can guide you though various complex financial decisions. However, when choosing a financial advisor, it is critical to understand how they are paid because this will be the single biggest factor that drives their recommendations.
The major types of financial advisor compensation are:
- Fee-Only: The advisor simply charges a fee for the financial guidance they give. They do not receive a commission based on where you invest your money but instead recommend what they believe suits your financial needs best.
- Commission: The advisor receives a commission for obtaining clients that invest in certain products. They are often associated with a company and encourage clients to invest in those specific products to meet their financial goals.
- Fee-Based: The advisor charges the client for the financial advice they give AND receives a commission for particular products they are able to sell to those clients.
It is obvious from this breakdown that both of us had encountered commission based financial advisors. Looking back there were very obvious indicators of this. Every time I had mentioned the possibility of investing in other avenues, he always steered me back to his products. He also emphasized the fact that if I only wanted to use his services for just those products, he would be completely comfortable with that. Lastly, when I mentioned I already had some of his offered products with other companies, he seemed slightly deflated.
This experience clarified what I value in a financial advisor. If I had to select a financial advisor, I would definitively select the “fee only” advisor. I may be paying at a slight premium but I am paying someone strictly to offer guidance with my best interest in mind. They aren’t conflicted by commission-based products, and they rely on my satisfaction with their recommendations to maintain their clientele and income.
Why Do People Choose Commission and Fee-Based Advisors?
It is important to look at these factors and determine what type of financial advisor would be best for your financial needs. If I had to take an educated guess, I truly believe many people who invest with commission or fee based advisors do so by lack on knowledge on the matter. They are looking for a “professional” to manage their money and the 30 minute sales pitch by a financial advisor makes them believe they have found that person. Rather than researching the financial recommendations themselves, they entrust their money to someone who uses graphs, numbers and terms that are above most people’s heads. Don’t be intimidated by their language. Ask questions and establish what their motives are. By doing so upfront, you can easily eliminate those that are targeting you for their gain.
A major component of financial fitness is understanding how your money is being managed. If managing your own money becomes too complex and you must hire a professional, it is imperative to recognize the motivation behind that professional. This will allow you to feel secure that the advice given is in your best interest. In addition to trusting their counsel, it is important to understand how they are investing your hard earned money. You do not need to comprehend it in great detail but you should know the general idea and strategy of the investments. Being completely removed from your finances, regardless if a professional is involved or not, is a hazardous situation. Out of sight, out of mind, out of your pocket.
“Achieving Freedom Through Financial Fitness.”
Disclosure: This site may receive compensation from the companies whose products I review. This site is independently owned and the opinions expressed here are my own.