So you are looking for a financial advisor and come to a worldwind of acronyms and confusing titles? We will try to break down all the buzz words to help you get a better grip on what to look for.
- Financial Advisor/Wealth Advisor/Financial Consultant/Financial Professional–what are the differences?
It’s a little complicated since there are no regulations on who can use the above titles and in our opinion it’s one downside to our industry and can get very confusing when you are searching for someone to help you with your finances. There tend to be trends on who uses what title; however, it definitely is not a good indicator on what they provide or what distinguishes them from another advisor. You will want to do a little digging to find out what type of licenses and designations the person has. The biggest thing you’ll want to determine is if the advisor is really going to help with full comprehensive financial planning, or are they going to sell you a product-whether it be insurance or investment-, or are they only managing investments ie. asset collectors. Neither of these is necessarily bad; it’s just you wouldn’t want to go to an asset collector if you are looking for someone to help guide on social security strategies. Or you wouldn’t want to go to an insurance salesperson if you are looking for investment advice.
- This is the lowdown on designations that make an advisor stand out from another. The designations below make a big difference, at least in our book.
Certified Financial Planner® (CFP®)-this is one of the more comprehensive designations for individuals in personal financial planning. The designation coursework and continuing education covers a robust list of topics-insurance (both property & casualty, and personal), investing, taxes, estate planning, and retirement.
Enrolled Agent (EA) or Certified Public Accountant (CPA)-advisors or planners who acquire these designations are ones who hold tax as an important topic for clients. They are going to be experts in accounting and tax issues. Some could offer tax preparation services as well. A CPA is going to be the superhero of the accounting world. They’ve gone through real rigorous training, have passed some pretty tough exams, and are licensed to handle a whole bunch of accounting matters. Most are going to be all-around experts in accounting, tax preparation, audit, and maybe even consulting. An EA might not be the superhero of the accounting and tax world; they are more like the ninja of taxes. They really focus on tax matters and are enrolled to represent taxpayers before the Internal Revenue Service. They go through some rigorous training and pass some tough exams as well. EAs can prepare tax returns, offer tax planning advice, and represent clients in front of the IRS. Both are awesome in their own rights, and can tackle different aspects of the financial tax world.
Chartered Financial Analyst® (CFA®)-this one is definitely considered to be one of the most difficult designations to acquire. It really focuses on investments and portfolio design.
Fiduciary-the buzz word that keeps on buzzing!
This is like the advisor titles, it’s used more often than not and is not regulated. Essentially what this breaks down to is if you are acting as a Fiduciary you are legally obligated to put your clients’ interests before your own. Ie-work in the interest of your client, not yourself. Typically you would have seen this with advisors that charge a fee to manage their clients investments in which they would put their clients investment interests ahead of their own. Now you are seeing this commonly used with commissioned (sales) advisors. We are not here to judge; however, we find it hard to understand how it’s possible to put your clients’ interest first when you have products with some being the more costly ones providing the highest commissions. Again, not always wrong, just an opinion. It can be advantageous to confirm a few things from your fiduciary advisor. Are they acting as a fiduciary 100% of the time, or does the advisor sometimes fall under the suitability standard? The suitability standard requires the advisor to recommend investments or products that are suitable for their client at the time of sale. Also ask are they earning a commission for any of their product sales? Again, not necessarily a bad thing; however, you need to know prior to making a decision. Asking this question leads us to our next topic-fees- how fun!
- How are advisors paid?
Fee-Only
This means that a client is paying the advisor for the advice that they give. The advisor is not collecting commissions or fees from the types of investments they offer. In our book, this provides the least amount of conflicts of interests between client and advisor. We have seen this term used incorrectly, so make sure to confirm that the advisor is not also earning commissions.
Fee-Based
This can be misleading and you will need to ask follow up questions. Most likely the advisor is charging a fee for the assets they manage; however, they can also earn commissions, awards for selling specific products, bonuses for hitting sales targets, etc. Again, not necessarily a bad thing; however, it could lead to a few conflicts of interest. Make sure to ask the advisor on all the ways they get paid and explanation on what types of conflicts of interest exist.
Commissions
Essentially, similar to fee based. You earn a commission on a product you sell whether it be an insurance or investment product. Some examples could be life insurance, annuities, mutual funds, etc.
*if you haven’t yet, check out our blog on “The Double F in Fees” for a more detailed explanation.
- What are the services provided-the value to you?
Comprehensive Financial Planning
This is a holistic approach to planning and it means that the advisor will utilize the following topics to create and maintain your financial plan- your financial goals, risk management (insurance planning), investment planning, tax planning, retirement planning, savings/debt (cash flow) planning, and estate planning. You are going to get the most value out of comprehensive planning as each topic will play into another topic. You wouldn’t want to set financial goals and then have your investment planning going in a completely different direction. Usually when you are working with an advisor who is doing comprehensive financial planning you are touching on all of these topics throughout the year; however, it could be a situation where no big life changes are happening and your retirement plan for example doesn’t need big updates.
Investment Management Only
This is when an advisor is only offering advice around investments. Usually you’ll see your advisor once a year and the conversation will mainly focus on your investment planning. You may touch on other topics but you don’t typically dive deep into how each topic coordinates with the other.
Designations, fees, and what the advisor’s services are all very important factors; however, another big one is someone you feel comfortable with. If you are dreading meeting your financial advisor at any point, that is a red flag. You should be excited to see them and feel a sense of relief after your meetings-at least that’s what our clients say!