Nearly 500,000 Americans fall under the loose description of “financial advisor” as their profession and, typically, most are happy to manage your money for you. However, less than 7% of these advisors actually provide any level of critical advanced personal financial planning, which essentially addresses all of life’s other financial complexities outside of their client’s portfolio of assets. In addition, most investors are not aware that there exists a difference in the type of relationship between advisors and clients. Let’s take a closer look, because understanding WHO you are working with can be a potential enhancement or threat to your financial plan.
Fiduciary vs. Suitability. Independent Registered Investment Advisors (RIAs), are legally held to a fiduciary standard. RIAs must always ask, “Does this investment serve the client’s best interest, or would an alternative solution be more appropriate?” Brokers or agents, on the other hand, are held to a suitability standard. This simply entails determining whether or not an investment fits for a client given his or her circumstance, yet may not necessarily be the very best choice.
Transparency vs. Disclosure. The policy for RIA’s, as governed by the SEC and Investment Advisors Act of 1940, must be complete transparency – nothing hidden, nothing held back. Conversely, brokers or agents only have to disclose certain, limited facts when selling an investment product; they’re not required to disclose every aspect of the transaction. That certainly doesn’t mean they don’t or won’t, but the requirement to do so may not exist.
Fee vs. Commissions. When RIA’s provide advice, every possible conflict of interest is removed. There cannot be acceptance of “soft dollars” or revenue-sharing from any source. Their clients should be the only ones paying them, rendering their advice completely objective. A broker, on the other hand, may be compensated for every transaction made, which can encourage activity (i.e., trading) and sales of products that might not perfectly align with the client’s goals.
Custody. In most RIA models, there’s an independent, third-party custodian – such as Charles Schwab, TD Ameritrade or Fidelity – that always houses client assets in the client’s name – your name. There should be no advisor custody of any client securities or cash. In most brokerage models, it’s a matter of in-house custody. Give your money to a brokerage firm and they will hold it, and typically earn interest on your money by lending it out.
Taking time to understand how your advisor’s practice is structured, how they are compensated, if they are a true fiduciary, and how your dollars are invested will help you make sound decisions when it comes to choosing a financial consultant. Who you work with does matter. Take the time to become informed and ask the right questions up front to ensure your best interests are kept in focus!
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