Before trying a new place or making a purchase, you probably look for online reviews on sites like Yelp, Amazon and Google. You have probably tried reading reviews of financial advisors and financial planners but it didn’t help much.
This is because financial advisors have not been allowed to post testimonials by their regulatory agency (SEC.gov). Most financial advisors have not posted client reviews in case the government considered reviews to be testimonials and reprimanded the advisor.
If online reviews aren’t helpful, how do you find a financial advisor you can trust?
By understanding the financial advisor’s motivation.
The most important thing to understand about a potential financial advisor or financial planner is how he / she is paid. Their method of compensation determines the advisor’s motivation.
There are conflicts of interest in the financial services industry that I have written about in the past. Each conflict of interest is a barrier to trust. Here are the possible ways an advisor gets compensated and the drawbacks of each.
1. Commissioned salesperson
Obviously, the method of compensation with the highest conflict of interest. Another name for this arrangement is “registered rep”. These advisors are affiliated with a broker. Not only do these people have the sales commission conflict of interest, but if they work for publicly traded companies (Morgan Stanley, UBS, Merrill Lynch, etc.) then there is another layer of conflict between the advisor and you.
Public companies have a goal of increasing profits every quarter and every year. The companies and employees are ultimately responsible to the shareholders. The way they increase profits is by taking it from their clients in the form of commissions and fees.
The multiple conflicts of interest in this model make trusting the advisor difficult.
2. Salaried salesperson
Slightly better than the first because the advisor is not getting commissions, but their livelihood still relies on meeting a quota each month. I will also include franchisees in this category. That means financial advisors who own Edward Jones offices for example.
3. Fee based financial advisor
This person charges in all manners possible. They take commissions for selling insurance and investments and may also charge fees for managing investments and fees for financial planning. They are probably really good marketers. They understand the obvious problems with number one and two above and have come up with a term that sounds like it is good for the customer, “fee based”, but in reality, it is a lot like one and two.
4. Fee Only Financial Advisor
This advisor does not take commissions. Fee only advisors are paid only by their clients. I would say being “fee only” is essential for finding a financial advisor you can trust.
It may seem like you are paying this type of advisor more than the others, but in reality, the amount has just been put out in the open. With the first three, the total amount of fees and charges you are paying is never revealed. That’s hard to trust.
5. Fiduciary
Fiduciary is a term that means the advisor will put your interests ahead of their own. A caring person would do that anyway, but there are laws to make sure that happens. If the advisor works for a Registered Investment Advisory (RIA) firm, then they are a fiduciary. They are required by law to do what is best for the client, not just what is “suitable”. If the advisor you are talking to is affiliated with a broker/ dealer or “dual registered” then you know they are not a fiduciary.
To find advisors in your area who are fee only and fiduciary, there are three websites you can use.
What is an independent financial advisor?
Being “independent” doesn’t carry as much significance as you might think. Financial advisors from all of the categories above except number 2 could call themselves independent. Independent in this case simply means they can recommend investments and / or insurance from more than one company.
Where does Andrew Marshall Financial, LLC fit?
Andrew Marshall Financial, LLC is a fee only (#4) and fiduciary (#5) financial advisor. We do not accept payment from any entity other than our clients. There are no hidden arrangements.
At Andrew Marshall Financial, LLC we go one step farther than even the vast majority of other fee-only advisors. We do not manage investments.
The conflict of interest between an advisor recommending you invest more, while simultaneously charging assets under management (AUM) fees has been removed from our financial planning services.
If you want to find a financial advisor you can trust, you must figure out how that advisor is being paid. They should be a fee only and fiduciary financial planner / advisor. The easiest way to find out is to read their website and ask them. If they won’t tell you up front, you should think twice about placing your trust in them. It doesn’t matter how nice a person they are when you meet them.