Did you know that there are several different types of financial advisors? It’s important to know the difference and understand how they each operate to find one that best fits your personal preference and goals. We’re going to look at 4 main types of financial advisors or planners, how they operate, and how they are compensated.
Brokerage House Financial Advisor
Some financial advisors work specifically for a large brokerage house, these are names you typically see on commercials and are more familiar with their brands. This may be an Edward Jones, Morgan Stanley, Merrill Lynch, Raymond James, etc. They may have local offices in your town and the advisor may be from your town and they may be the branch manager or work as an advisor for that firm at that local branch. They typically do not own their business, which means they work for those brokerage houses and manage a book of business for that brokerage house. Some consumers feel more comfortable dealing with a big brand name. It’s important to know advantages and disadvantage when you deal with a big brand name. Those advisors may be limited to offering you products their brokerage house tells them to offer. That’s not necessarily a bad thing. It helps that brokerage house to understand what their advisors are presenting to clients and those brokerage houses are going to make sure those options are good options in general across the board. Sometimes what happens though, as a consumer you are kind of bunched into cookie cutter type solutions that may or may not be the best option for your specific situation. If you were to choose an advisor at one of these big name firms, you may be offered a solution that is more general and typically the fees you pay may be slightly higher than average. As far as compensation, these advisors primarily work off commission from products they sell or fees they charge for managing your investments. Some advisors may be on a salary plus commission or bonus. It’s important to make sure you know what you are going to be charged and make sure the solution you choose is ideal for your situation.
Financial Advisors in Banks
Large financial Institutions have had financial advisors in their organizations for decades. Your local bank typically did not have a local advisor in their branch offices in the 1980’s and 1990’s, but more recently in the 2000’s, financial advisors are more common in your local banks from the large regionals to the small town community banks. Those financial institutions have seen the need to offer these services to their customers in the last 10 to 20 years. If you were to talk to a financial advisor in a bank, they typically work differently than a financial advisor at a brokerage house. Banks in general have to be more conservative, so broker dealers that deal with banks also keep their product offerings somewhat more conservative for those financial advisors that operate for a bank. Typically, the products offered may be more narrow than the solutions offered through a big brokerage house, and you are typically offered something more cookie cutter than a brokerage house as well. Advisors within a bank are usually compensated with a combination of salary plus commission or bonuses. If they’re an established advisor, they may be on a commission only schedule, as well. If you are someone that is very conservative and prefer to deal with your local bank because you trust the institution, a bank advisor may be best for you.
Fee Only Advisors or Planners
In the last 10 years or so, fee only advisors or planners have become more common as well. These advisors typically pride themselves in offering their services for a fee, not a commission or fee for asset management. This type of advisor is typically referred to as a financial planner because they take a comprehensive look at your financial goals and help you implement strategies that will help you meet those goals. Their services are not just based on investments, but can range from budgeting, debt management, college planning, social security planning, insurance, or any financial area you need help. These advisors may charge a fee per quarter, per year, or per plan. They vary depending on how involved your plan needs to be. These types of planners may or may not manage your investments for you. They may include managing your funds into the fee they charge you or they may only offer you planning without investment management. The ones that do not manage your investments typically will make recommendations to you for you to implement or your investment advisor to implement. Some people like working with these types of planners because they don’t like paying a fee based on commission and they have a broad array of financial needs they need help with managing. A financial planner can help them accomplish their goals in this format. Some financial planners may be licensed to sell securities, some may not. When looking for a financial planner, you should make sure they have credentials to be a planner. The most widely recognized designation is the Certified Financial Planner designation. If they have this, they have gone through rigorous training and have had to meet specific criteria to hold this designation.
Independent Advisors and Planners
The last group of advisors and/or planners I would like to highlight is the Independent Financial Advisors or sometimes referred to as Hybrid advisors. These advisors may be in your local town, but the name of their firm may not be one that is familiar. The reason for this is because they are not employed by a big brand name brokerage house or institution. They have chosen to operate as a stand-alone business with the help of a broker dealer that allows them to brand their business to their own liking. The broker dealer may be a name you recognize like a Fidelity or Schwab, but the name of the advisors business is unique to that advisor. These advisors are still subject to the same regulatory requirements as other advisors; however they have more freedom to choose which products and services they offer to their clients. They may also be compensated by commission, fees, or a combination of both. In general, these types of advisors may be more widely versed in subjects related to several aspects of finances. In addition to having to know the details of the products and solutions offered, they typically can help with tax related questions, retirement planning, and many other areas you may have questions about. These advisors have developed their book of business on their own brand or name versus the brand of a big company. They likely have some expertise in specific or a broad array of financial subjects. Typically, many independent advisors get their experience in a big brokerage house or a financial institution, then realize they may be limited, so they decide to make a move to establish their own business. You should still be asking the same questions in regards to the advisors experience, the fees you will be charged, and make sure you fully understand the investment options that are being recommended to you.
Takeaway for you as an investor
Its always important to understand what types of products you choose and the fees you pay. When choosing an advisor, it’s important to understand the advisor’s expertise and limitations as well. Have a list of questions you want to ask the advisor. If they present you with a solution and you do not understand it completely, ask more questions. Don’t take a product that you don’t understand or are not comfortable with just because they presented it to you. Always ask how the advisor is compensated. If they fumble around with this question, that should be a red flag. Ask about their expertise, how long they’ve been in the industry, or if they specialize in certain areas. You should also go to FINRA’s broker check to see if the advisor has had any disciplinary actions on their record. I also highly recommend making sure they have some kind of designation in addition to their licenses. Just because someone has their licenses to sell securities doesn’t mean they have knowledge in managing money or other aspects of personal finances. There are several designations now, some are more recognized than others, but you should ask your advisor if they’ve got any prior to hiring them.
There are good advisors in all channels listed above. You may know someone you highly trust and respect in any of these channels that you prefer to work with. This article is meant to highlight some differences in how they all operate and to help those who do not know where to start when choosing an advisor.
The link to FINRA’s broker check is www.brokercheck.finra.org.