A MOMENT OF CLARITY
How well do you know your advisor?
People often find their advisors through word of mouth from friends, family or their personal network. While this is a good start, it is crucial to do research on the different criteria to be aware of and to fully understand the kind of advisor you will be working with.
While there may not appear to be much difference at first, financial advisors can have varying degrees of expertise, experience, credentials, service offerings, compensation structures and even client relationship standards to abide by. The financial advisor title can be held by an insurance professional, an investment manager, a broker or a private banking advisor at a large institution, and these are only a few examples. Below are just some of the key factors you need to know about your advisor.
One factor that is probably the most important is whether an advisor is a fiduciary. A fiduciary is an individual who is ethically and legally required to always act in the best interests of their client. As an example, an advisor who is a fiduciary is required to make ongoing decisions solely based on what is best for their client (rather than what might provide more financial incentive for themselves). This includes making investment decisions that best fit their clients’ goals and objectives, versus a non-fiduciary advisor who is not required to do so. Surprisingly, not all advisors are held to this higher fiduciary standard. Others may follow what is referred to as a suitability standard, which only requires that the advisor have a reasonable belief that an investment or transaction is suitable for their client.
Another item to fully understand is how the advisor is compensated. Are they fee-only, fee-based or commission-based? If the advisor is commission-based, they are not a fiduciary and their compensation structure can potentially incentivize them to make investment decisions that are not in the best interest of their client. A fiduciary advisor would either have a fee-only or fee-based compensation structure. Be sure to know where your advisor’s priorities are.
It is important to consider the advisor’s service offerings, as not all advisors provide the same level and depth of service. Do you only need assistance trading stocks? Is there a need for professional portfolio management where expertise and advice are provided? Are there more complex tax issues that require advanced technical expertise? Perhaps there is the need for an advisor who can provide the most comprehensive advice available – including estate planning, a review of all insurance coverage, cash flow and debt management, education funding and so on. Note that over time, as your balance sheet grows or your financial situation becomes more complex, your needs will most likely evolve. Receiving an inheritance, preparing for retirement or experiencing a divorce or loss of a loved one are just some situations where additional technical expertise may be needed.
If you already have an advisor, it is healthy to periodically review these criteria and determine whether they are still the right one for you. If not, consider beginning the search for a new one. Once you are with the right advisor, you will experience peace of mind knowing that you have put your trust in the right hands