There are more than 300,000 financial advisors looking to make money off your money but finding a financial advisor that will set you up for a prosperous financial future is challenging. Unlike some other professions, financial advisors often get lumped together in to one big pool of people when, in fact, there are different types of advisors.
Some advisors work for large brokerage firms called wirehouses. Their job isn’t so much to directly manage your funds but instead to get you in to the right financial products that are managed by others in their company. Morgan Stanley, Goldman Sachs, and Wells Fargo Advisors are examples of wirehouses although each serves a different type of client. They are almost always commission based and have monthly and yearly goals that they’re expected to meet. These goals aren’t tied to the performance of your portfolio. They’re tied to how much money they bring in to the firm.
Let’s go to what may be considered the other extreme in financial advisors. The independent advisor or RIA, works with a team of other advisors or on their own, often with an office manager. Independent advisors work on a fee based or fee only basis where they have no incentive from a company to meet sales goals and receive no commission for selling products. (There are also commission based independent advisors)
These fee only advisors have your best interest in mind not only because they aren’t working for somebody else but because their fee structure often includes a percentage of your assets. When you’re making money their fee is rising because it is based on a percentage of your total assets. Types of arrangements where both parties have the same goal are always best for your money.
There are other types of advisors that fall in between these two. A fee based advisor charges you a fee for their services but may receive some commissions for pushing certain products. Fee only advisors find it difficult to sustain a thriving business especially when they’re just starting which is why some will sell insurance or other products to boost their revenue. As long as they disclose that to you, you can ask them to only recommend products where they aren’t making a commission. For example, instead of recommending funds, they can put you in to individual stocks and bonds.
Which type of advisor is best for you?
It sounds like I’m vilifying the commission based advisors and to some degree that may be true but high net worth people often use wirehouses for management of their assets so it wouldn’t be fair to say there is no place for these types of brokerages and advisors.
Wirehouses often have account minimums and those minimums may be higher than most middle class people can meet and although independent financial advisors are highly qualified to meet the needs of high net worth people, those with $10,000 or more can retain the services of a fee based or fee only advisor who will build a plan for their financial future. (Some will take you as a client with less)
What to look for in a financial advisor
First, look for an advisor who wants to know you. They should poke and prod in to your history, your personality, your fears, your dreams, and anything else that you do or don’t want to tell them. Don’t be put off by somebody who asking a lot of questions. This is the sign of a great advisor.
Next, they should first develop a plan for you based on what they learned from you. Most advisors charge $1,000 or a little more if you don’t want them to manage your money for you. That plan may be free if you allow them to build and manage your portfolio. They will charge you a percentage of your account balance. Between 1% and 2% is standard.
Ask them if they receive any commissions based on their recommendations. If they do, that is cause for a little more caution although not a deal breaker. They aren’t allowed to guarantee you a rate of return but they can give you an estimate based on current market conditions.
Finally, certified financial planners have a higher degree of training than RIAs but they’ll cost more. Remember that you can always give an advisor a portion of your money to test their skill and service. If you like them, give them more.
The many different types of advisors serve various types of clients. As a general rule, look for those who have interests aligned with your own. Fee based or fee only advisors make and lose money along with you so they have an interest in working hard for you.