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Choosing a Financial Advisor

A Four-Part Series

  1. Follow the Money – The Importance of Understanding an Advisory Firm’s Structure
  2. Trust but Verify – Make Sure Your Interests are Coming First
  3. Hiring the A-Team – Evaluating Talent and Resources Available to Serve You
  4. It’s a Match – Comparing Teams and Choosing your Best Fit

As anyone who has ever started down the path of researching options for investment management and wealth planning can attest, the litany of choices can quickly become complicated and confusing, making the evaluation process feel uncertain and even overwhelming.

Widely available lists of questions to ask of potential advisors can be useful, but often lack context regarding what issues are the most consequential and why those issues can be so important.

In our four-part Choosing a Financial Advisor Series, we provide information and perspectives to clarify the distinctions within the financial industry, which will help you understand how to think about choosing the right advisor for your specific needs.

In Part 1 of the series, we explore a shortcut that can help draw meaningful distinctions among different advisory firms.

Follow the Money:

The Importance of Understanding an Advisory Firm’s Structure

There was a time, in the not-so-distant past, when a search for a financial advisor was often limited to finding a stockbroker to handle investments.

Today, that search can be much more complicated. The financial industry has dramatically expanded its offerings and services, and the lines distinguishing one advisory model from another have been blurred. Brokerage firms, registered investment advisors, hybrid or dual-registered firms, financial planners, wealth managers, investment executives… and on and on it goes. It has become extremely difficult to cut through the jargon to comprehend the differences and distinctions among advisors and their firms.

Fortunately, there is a shortcut towards understanding the factors that matter most.

Simply put: look at how an advisor gets paid for their work.

As Accredited Founder and CEO Ross Levin recently wrote in his Star Tribune column, “how someone gets paid can create conflicts of interest.” It is more important to be aware of these potential conflicts than it is to fully understand the nuances of the regulatory issues that might impact a Broker Dealer from a Registered Investment Advisor, for example.

Generally, financial advice will be obtained in one of three ways: by paying an advisory fee, paying commissions, or paying a combination of advisory fees and commissions. The “right” option will often depend on an individual’s specific circumstances.

  • Fee-only advisors are paid directly by a client and don’t receive compensation from any other outside source, such as commissions or trading fees. Their compensation is independent of the investments they recommend. These advisors collect either a retainer or a percentage of assets under management, and therefore benefit from the more assets they manage.
  • Commission-based advisors are paid from the sale of investments. They may also receive a fee from selling a particular product, collect a percentage of assets a client invests, or collect a fee per investment transaction. This compensation model may create potential conflicts by encouraging the recommendation of investments that generate higher commissions or engaging in excessive trading.
  • Fee + Commission advisors are, not surprisingly, paid through a combination of advisory fees and commissions. As Levin notes, “while some firms use the term fee-based, there is no such thing.” These firms simply collect fees and commissions, and are therefore subject to the same potential conflicts as commission-based advisor.

Understanding how an advisor is compensated can often be the clearest and most efficient way to understand how your interests will be aligned and prioritized.

In the next installment of our series, we will explore the fiduciary standard, including what it means from the perspective of potential clients of a firm, and what it doesn’t.

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