Choosing a Financial Advisor Part 1: Follow the Money
January 4, 2023
Choosing the right financial advisor is a vital step toward aligning your financial goals with an optimal outcome. Choosing an advisor who always puts your interests ahead of their own is key. In the following paragraphs, we will discuss three primary types of advisory firms and how their advisors differ in approach, compensation, and motivation.
The first category we will discuss is insurance companies, in particular, life insurance companies. Insurance agents frequently offer financial planning advice connected to life insurance products, annuities, and mutual fund investments. Insurance agents earn a commission through the premiums charged for insurance products, and mutual fund fees.
Next are financial advisors connected to brokerage companies. Brokerage advisors also earn commissions from the sale of stocks, bonds, mutual funds, and other financial products offered by their firms. Most advisors fall into this category and most often come to mind when someone thinks of a financial advisor. This is not surprising, as brokerages were among the first to enter the advice market and many have several decades of brand recognition.
Finally, we come to fiduciaries. A fiduciary does not sell financial products. Rather, a fiduciary offers financial advice and manages investments on behalf of clients for a flat fee. Advisors employed by a fiduciary firm are not compensated by commission. Fiduciary advisors are paid a salary, or a proportional share of the firm’s income if they have ownership in the company.
Important distinctions exist between insurance companies, brokerage firms and fiduciaries. As the name implies, a fiduciary is held to the fiduciary standard. This means a fiduciary must always put the interests of the client ahead of their own. They are held to this standard through the regulatory bodies that oversee their activities. Insurance companies and brokerages need only demonstrate that the products they sell are suitable for their clients. This is known as the suitability standard. Because advisors connected to insurers and brokerages are paid commission for products sold, potential for conflict of interest may exist. This may be due to varying levels of compensation of certain products or a bias toward products owned by their employer firm. Potential for conflict of interest is meaningfully lower for fiduciaries Given their flat fee structure. There remains some potential for such Conflict which may vary from firm to firm, though it is notably lower when compared to the other two.
It is important to be a wise consumer when hiring any advisor. As a consumer you should always be prepared to ask questions about how an advisor operates and how they are compensated. Any potential advisor should be transparent about the cost of doing business with them, and readily discuss areas where conflict of interest could exist. A successful relationship with a financial advisor should be long term and based on trust. It makes sense to take your time and make a choice that is aligned with your best interest.
Explore VeraBank Wealth Management Services.
Securities provided by VeraBank Wealth Management are not deposits of VeraBank, are not FDIC insured, have no financial institution guarantee, and may lose value.
Online Financial Education.
Interactive for all ages.