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Tag: Selecting an Advisor

CERTIFIED FINANCIAL PLANNER™ vs Financial Advisor: What’s the Difference?

Written by support@seostats.com on . Posted in Financial Planning, Resources.

Recently, a client told me about a conversation they’d had with a friend. The client’s friend claimed they did not work with a financial advisor because advisors charge high commissions.

This is a misconception that many, many people hold as the truth – and most professionals in the financial industry do very little to clear up the confusion.

When it comes to a CERTIFIED FINANCIAL PLANNER™ vs financial advisor or other industry professional, there are differences you need to understand.

Of course, my client knew how far from the truth their friend was. At Lake Road Advisors, it’s not that we don’t charge high commissions. We don’t charge commissions at all!

But aren’t we financial advisors? We are – and all advisors are not running the same type of business. Here’s what you need to understand when considering hiring a financial professional, including the differences you’ll find between a CERTIFIED FINANCIAL PLANNER™ vs financial advisor.

 

The Lack of Transparency Leads to Confusion Around Who Gives Financial Advice

This misunderstanding about how businesses charge to deliver financial advice to their clients is part of why many people simply don’t trust the financial industry as a whole. In fact, Financial Advisor Magazine reports that only 23% of investors trust financial advisors.

I get it. I personally know many people who have had bad experiences with pushy salespeople who call themselves financial advisors and sold products for high commissions.

This bothers me as someone with the job title “financial advisor.” The reality is, that’s all the term is: a job title. It does not confer any kind of expertise, knowledge, professionalism, or ethical standard.

Because anyone can use the term, I often refer to myself as a CERTIFIED FINANCIAL PLANNER™ vs financial advisor, because I don’t want to be lumped into that broad category that includes businesses that look nothing like the financial planning practice we run at Lake Road.

The problem starts with transparency. It’s very difficult for you as a client to know precisely who you’re dealing with when someone shows up calling themselves a financial advisor.

 

CERTIFIED FINANCIAL PLANNER™ vs Financial Advisor: There’s a Difference!

“Financial advisor” is a broad, unregulated term. Again, anyone can call themselves a financial advisor, regardless of background, education, or training.

Someone who is an insurance agent, a stock broker, an investment advisor, or a financial planner can all call themselves a financial advisor — even though, clearly, these professionals all do very different things for the people they work with.

Making the problem even worse is the multitude of titles and designations that financial advisors have. Many of these titles are little more than marketing strategies; they don’t actually indicate relevant training or experience.

You can dive into some of the specific designations that do hold weight here. Generally speaking, you want to look for someone who holds the CFP® credentials.

A CFP® is a CERTIFIED FINANCIAL PLANNER™ accredited and regulated by the CFP® Board.  To use these marks, a CERTIFIED FINANCIAL PLANNER™ must undergo rigorous education, training, and experience standards. They must also sit for and pass an intensive board exam and maintain continuing education credits over time.

Perhaps just as important, if not more so, is the fact that a CERTIFIED FINANCIAL PLANNER™ also needs to commit to a code of ethics. As a CFP®, I am legally and ethically bound to act in the best interest of my clients at all times. Our firm upholds the fiduciary standard — no matter what.

You’d think this would be a given for any financial professional, but that’s where the high-charging advisors come into play. Not all financial professionals are required to act in their client’s best interests. Some only need to do what’s “suitable,” meaning it can work for you but it’s not necessarily the best option or solution.

 

When Working with a CERTIFIED FINANCIAL PLANNER™, You Know What You’re Getting

Remember, anyone — regardless of what they actually do for you — can call themselves a financial advisor. But only certified and credentialed professionals can use the CFP® marks, which is why this is a great designation to look for if what you need is comprehensive financial planning and investment management advice.

If you want to go a step further, look for a CFP® who works within a fee-only firm. When a planner or advisor is “fee-only,” it means they only accept payment for services directly from their clients; they don’t receive commissions or payments from third parties. The only thing they sell is their service, which again, is comprehensive advice (not products).

Working with a CERTIFIED FINANCIAL PLANNER™ vs financial advisor can bring more transparency to the process. You know what you’re getting.

To me, the real value in what we do lies in the relationships we build with clients and the financial planning — not the investment management. We take our time to understand your goals and what’s important to you, and we don’t prescribe before we diagnose.

You may not get that with a salesperson whose top priority is to sell you a product. If you want a financial plan, make sure you go to a financial planner who delivers that advice, rather than recommends products (or specific investments before understanding what you’re trying to achieve!).

Ultimately, I do agree with that friend of my client’s who disliked high-commission advisors. If you are paying over 1% for a financial advisor who talks to you once a year and only about your investment portfolio, then yes, you are overpaying.

But don’t shun all means of receiving financial advice. Instead of not working with anyone, consider working with an actual CERTIFIED FINANCIAL PLANNER™ who serves as your fiduciary to build a plan for not just your investments, but your entire life.

Want to see a quick video on How to Find the Right Planner For You? Click below and watch Episode 3 of “The Build”, our 24 part video planning series that takes you from start to finish in building a financial plan with Lake Road Advisors!

Follow These Steps When Selecting a Financial Advisor

Written by support@seostats.com on . Posted in Fiduciary.

When it comes to securing your economic future, it’s important to select the right financial advisor.  No matter how educated or market savvy you are, professional financial advice can be invaluable when your finances grow to a level that creates more complexity, or when you may not have the time, energy or desire to manage your finances.

When you do decide it’s time to seek a financial advisor, there’s more to selecting the best professional for your situation than scouring the internet, reading a few dozen reviews, or taking recommendations from knowledgeable friends. There is no single ‘right’ sort of financial advisor. Everyone has different financial goals, needs, and circumstances. The right financial advisor for you is the one that takes these individualized factors into consideration and helps you to meet your goals.

Here are the steps you can take to select a financial advisor:

 

Look at Their Credentials

You’ll want to first decide what type of help you are looking for. Is it for a one-time issue (i.e. purchasing life insurance or putting together a buy sell agreement for a business) or are you looking for longer term guidance and a relationship (retirement planning and tax strategies)? When you know the type of financial guidance you need, you can then narrow down your choices to the appropriate professionals.

Interestingly, and perhaps a bit alarming, there is no standard for using the title of financial advisor. Just about anyone can hang up a sign that says they’re a financial advisor, but that doesn’t guarantee any sort of real expertise. And despite the financial industry’s and our government’s talk of change, “Should the SEC regulate the ‘advisor’ title?” we are probably still far from any official regulation for the financial advisor title.

That being said, the credentials that a purported financial professional has will tell you plenty about their qualifications to meet your financial needs.

A financial advisor can have several certifications. CFP®, CFA, and CPA may be a few that look most familiar. Knowing what these letters mean will help guide you in your selection process. If you are looking for specific tax advice, a Certified Public Accountant (CPA) is a credential you will want to see. If you are looking for holistic financial advice, I recommend you make the CFP® (CERTIFIED FINANCIAL PLANNER™) designation a non-negotiable criterion for your selection. . The CFP® certification requires the highest fiduciary standard, not to mention several years of financial planning experience, extensive coursework and the passing of a comprehensive exam. For a full list of financial designations and their definitions, visit the FINRA website.

 

Choosing the Right Type of Financial Advisor

There are many different ways to categorize different types of financial advisors, but there are two distinctions that every investor should know about and understand fully.

           Fiduciary or Not

Some financial advisors are fiduciaries and others are not. It is generally recommended to choose a fiduciary for your overall investment management needs, because they are legally bound to place your interests above their own. . However, it may be ok to work with a non-fiduciary in certain situations. For example, if you just needed life insurance, you could go to an insurance agent who is licensed to sell you the financial product you need, but who is not obligated the same way other financial professionals are to meet the highest standard of care.

           Compensation Model

The second level of distinction is based on how a financial advisor is paid. In general, there are three types of financial advisory fee schedules: commission-based, fee-based, and fee-only. You can take a closer look at these three types of compensation models in this recently published article in Kiplinger: Your Financial Adviser Charges What? Understand the Value of Advice. If you seek a longer-term relationship and advice, I recommend a fee-only advisor. Fee-only advisors adhere to fiduciary standards and are paid either through hourly rates, flat rates, or as a percentage of the assets they manage.

 

Find a Financial Advisor that Fits

This is probably the most important step of them all. By taking the steps we’ve discussed, you’ve already gone a long way towards locating the proper fit, but there are a few additional factors to take into consideration.

  • Trust: You need an advisor that you’re comfortable with. In my opinion, it’s impossible to trust someone after only meeting them once or twice, but you need to have a good gut feeling and get along with them from the start.

  • Long-Term Vision and Value: Just as importantly, the right financial advisor understands the vision you have for your financial future and is willing to help you work toward it. This does not mean that the right financial advisor is the one who signs off on your every whim. In fact, the opposite situation is often preferable.

  • Objective: The right financial advisor will always tell you the truth about your decisions, whether it’s what you want to hear or not.

Conclusion

With the sheer amount of information available out there, it’s easy to get overwhelmed and put off the important decision of choosing a financial advisor. Unfortunately, this isn’t a decision you should wait too long to make. Hopefully, what you’ve read here will eliminate some of the worry and hesitation that comes with excessive information. But don’t be in a hurry either. By following these steps and practicing your due diligence, you’ll find an advisor that can help you achieve your personal goals.

Why You Should Choose a Fiduciary as a Financial Advisor

Written by support@seostats.com on . Posted in Fiduciary.

As of recently, the fiduciary standard – what it is and who is legally required to abide by it – has made the round of headlines. Just Googling “fiduciary standard” pulls up news article after news article about potential regulatory changes and the political arguments surrounding them.

The fiduciary standard is one of the most significant requirements within the financial service industry that protects investors. Investors are wise to want it and to want the fiduciary standard required of all providers of financial services. Wall Street, on the other hand, is keen to limit the spread of the fiduciary standard else it cut into profits.

When it comes to personal finance and your financial well-being, working with a professional who must put your best interests first isn’t just a good idea – it’s one of the smartest financial decisions you can make.

This post is designed to show you why a fiduciary is the best choice for your financial advisor. To do this, we’ll discuss the following topics:

•    The importance of choosing the right financial advisor.
•    The possible consequences of using a financial advisor who isn’t a fiduciary.
•    Fiduciary vs. suitability standards.
•    What a fiduciary is and what their obligations are.

The Right Financial Advisor

The person you choose as your financial advisor can be one of the most determining factors of your financial life. That’s when the right financial advisor comes into play. You need a financial advisor who can provide sound and objective advice.

But who is the ‘right’ financial advisor? Well, the short answer is this – the right financial advisor is one who has your best interests in mind, not their own. In other words, the right financial advisor is a fiduciary.

What a Fiduciary is and What Their Obligations to Clients Are

In the most general terms, a fiduciary designates an investment professional who is ethically and legally obliged to put their clients’ interest first, above both their own and any other entity who might benefit from a conflict of interest.

In other words, they have to live up to rules that are called ‘fiduciary standards.’ These standards, which are in marked contrast to the ‘suitability’ standards we’ll explore below include the following:

•    The advisor is obliged to place their interest below the interest of their client.
•    The advisor must reveal any real or possible conflicts of interest to the client.
•    The advisor is obliged to their best to ensure that the financial advice they dispense is based on the most accurate and complete information.

As you can see, an advisor who adheres to fiduciary standards has very specific guidelines that dictate what ‘putting client interest first’ actually means. Working with someone who doesn’t can lead to less than optimal results for you and your family. Now let’s have a look at the difference between fiduciary and suitability standards.

Fiduciary vs Suitability Standards

If a financial advisor is not a fiduciary, this means that they only have to meet a set of requirements known as “suitability standards.” Put briefly, this means that the advisor must have a justifiable belief that the advice they are giving is suitable for you. Broker dealers are a good example of financial professionals who are held to a suitability standard. These are advisors working at Morgan Stanley, Bank of America, Edward Jones, and other large financial service retailers.

This is obviously significantly less protection for you as a client. It leaves far too much room for the advisor to place their interest over your own, especially in terms of recommending high commission investments over low commissions that are both ‘suitable’ for you.

For instance, let’s say an advisor recommends several mutual funds to choose from for your retirement plan. You would naturally ask your advisor which one he or she would recommend for your individual needs. Each option presented is ‘suitable’ for you and your retirement goals, but your advisor may recommend the one that pays him or her the highest commission over the one that may be the better choice for your situation. The suitability standard enforces that your financial advisor provides you with suitable options, but the fiduciary standard requires your financial advisor to provide you with the best option.

Conclusion

Unfortunately, not all financial advisors are created equal, especially when it comes to putting your interests first. Even if they work for a reputable and nationally known firm, some financial advisors have both the means and the incentive to do serious damage to your long term financial health.

The reason? Because not all financial advisors are fiduciaries. And if your financial advisor is not a fiduciary, then they are only required to meet ‘suitability standards’ that allow for too many conflicts of interest and are far from a guarantee that your interests will actually be served.

The bottom line is that your interests are best served by a financial advisor who adheres to the more rigid fiduciary standards than those who do not. Do not hesitate to find out right away if any advisor you’re considering if he or she adheres to fiduciary standards. If not, continue searching until you find one who does.

Understanding Your Fee Schedule

Written by support@seostats.com on . Posted in Fees.

For most items or services you purchase, as a consumer, price tends to be pretty straight forward.  If you need a gallon of milk you can go to a supermarket, drug store, or gas station and know immediately how much the milk is going to cost you.  Understanding how much you are paying for a specific product or service, is usually a straightforward process.  Unfortunately, when it comes to hiring a financial advisor, pricing can be complex.

Last week, Betterment, the asset manager I use for my clients, published a “Quick Guide” to compare the costs associated with different asset managers.  This is a must read for anyone who invests.  While this guide does a great job of breaking down the investment fees you will incur across different platforms, it is only part of the story.

To help you better understand your fee schedule, I have a listed a few questions you should consider asking your advisor:

 

What services do you provide?  Investment management?  Financial planning?  Insurance sales?

The prices in this guide are for investing only. What this chart outlines is the fee associated with purely investment management, which is only helping you pick stocks, bonds, and make allocation decisions.

Investing is an important aspect of your financial plan, but it is only one part. Comprehensive financial planning is not included as a service in the “Quick Guide” examples.

 

Can you explain your fee structure?

Once you understand the specific services you are receiving the next step is to understand the associated fees. When I meet with a prospective client and we discuss my fees, I always ask what they are currently paying their advisor.

They usually go back to their current advisor and ask the question, “What is my fee schedule?”  Here is where the current advisor explains the management fee (usually 1%) and points them to the account statement to show the funds coming out quarterly.

Now it gets tricky.  Technically, the client may only be paying their advisor 1%, however, that is often only part of the fee.  If you hold any mutual funds or exchange traded funds in your account, you are also paying the company that manages the mutual fund or exchange traded fund product that you own.  The fee you pay these managers is called the expense ratio.  According to Morningstar, the average mutual fund expense ratio in 2014 was 1.19%.  Investors rarely see these fees coming out as these are commonly paid by a reduction in the fund share price.

In addition, investing in stocks, bonds, or mutual funds will often include transaction costs.  These are the costs incurred, by the investor, to buy and sell securities.  Transaction costs are not included in the management fee charged by your advisor.

Lastly, how is your advisor being compensated for the planning work and advice they provide?  Is it a flat fee amount? Is it an additional % of the assets?  Are you being charged hourly?

 

Do you receive any incentives for selling me specific investments?

I spoke about this topic a few weeks back in my blog post “Incentives Matter.”  This doesn’t mean that the investment they are suggesting is wrong for you, but wouldn’t you want to know if your advisor was financially motivated to sell you a particular product?

Anyone who provides financial advice (investment advisors, financial planners, brokers, financial advisors) should be transparent with their fee schedules and the corresponding services they offer.

Clearly understanding your fee structure is a critical part in evaluating the services you receive.

 

Looking for an Advisor? Read our free whitepaper “The Ultimate Guide for Choosing Financial Advice” to learn the questions you should be asking!

Incentives Matter!

Written by support@seostats.com on . Posted in Fees, Fiduciary.

In last week’s Wall Street Journal, one of my favorite writers, Jason Zweig, wrote an article entitled “Mutual Fund Fees: A Bad Incentive Fades Away” which highlights a known conflict of interest that exists in the financial services industry where advisors are paid by mutual fund companies to sell their proprietary products over other funds.

This payment could soon disappear with the Department of Labor’s expected move to the “fiduciary” standard and away from a “suitability” standard.

Many large brokerage firms and insurance companies are held to a suitability standard, which means they can recommend a product for you that only has to be deemed suitable, but not the best for your needs.  Registered Investment Advisors, or RIA’s, are held to a fiduciary standard which means they must recommend the best product and or strategy for you. (This video take a humorous approach but does a good job in explaining the differences)

I was recently reminded how important incentives are in all aspects of life.

On a late night trip to a walk in medical clinic, my daughter was diagnosed with an ear infection.  Pretty standard for a 6 year old. The doctor prescribed an antibiotic and she would be feeling better in no time.  The prescription was called in and we proceeded to our local pharmacy to pick it up.  While checking out I was stunned to see the antibiotics rang up to a price of $225?

I asked the pharmacist if this particular antibiotic was specifically prescribed for ear infections?  Nope.  For children?  Nope.  He couldn’t understand why this would be prescribed over a whole host of other drugs that would be 2% of the cost.

I decided to call the doctor and ask that very question.  I didn’t get through to the doctor but did get the physician’s assistant who said she would check.  Needless to say, when the PA returned to the phone she had already called in a new prescription for another antibiotic that was the same but cost $4.  When I informed the pharmacist about this he snickered and mentioned that the doctor must have been incentivized to prescribe this particular medicine.

What if I hadn’t know any better?  How often does this happen?

This doesn’t mean all doctors do this but like financial advisors, incentives do matter. In this case, the prescribed medicine was perfectly suitable for my daughter but I would have paid an extra 5525%!

This is an extreme example, however, as Zweig points out in his article, “Until advisers are paid solely by their clients, no one will be able to tell whether the advice is tainted”.