Is your financial advisor “independent”? And why does it matter?

How do you know if a financial advisor is independent? Financial advisors may call themselves independent, but are they? Here’s what you need to find out – are they free of conflicts of interest? And do they have the freedom to work with you in the ways that best serve your needs?

Compensation

How advisors get paid is the first place to look for conflicts of interests. Those who are paid by commission may be influenced to recommend higher commission products. This may not always be the case, but you have a right to ask.

Because I am an investment advisor, not a broker, I am not compensated through commissions. Instead, my clients pay for my advice and expertise, not my transactions. My compensation is considered “fee-based,” which means I’m paid through fees such as a small percentage of the funds that I manage for you, or an hourly or project rate. As a self–employed Investment Advisor, I am free to offer compensation options that make sense for my clients.

Furthermore, as the owner of my own firm, I am not subject to the pressures and limitations imposed on advisors who are employees or independent contractors of larger firms. Here are a few examples of their conflicts of interest:

• Paid by commission and/or revenue sharing with employer
• Need to meet quotas – on sales volume, commissions, numbers of potential client contacts, etc.
• Pressure to use proprietary products (that will pay more to the advisor and/or the brokerage)
• Limited in the types of investment products and strategies they can use
• Must apply the pricing mandated by the company, no discretion based on a client’s situation

For captive financial advisors (employed by or contracted to a large firm), if they don’t sell something, they don’t eat. How they get paid is based on what they sell.  It’s important to become clear about the pay structure of the advising industry.  Don’t be afraid to ask, “How do you get paid?” It can reveal a lot.

Flexibility/Freedom

When it comes to flexibility and freedom, as a true fiduciary, I have the autonomy to choose what’s best for my clients, in terms of financial products, services, pricing, and strategy.

Captive advisors are limited as to what information they can share. Because I am truly independent, I can seek out what serves my clients best and I’m not locked into:

• Offering a certain type of service
• Charging a certain type of fee
• Offering a certain type of product

In short, I have access to more choices for you, the client. Why is having more choices better? Because I can use products and services with lower fees, and I am not restricted to one-size-fits-all strategies.

As the owner of my firm, I can spend the necessary time to truly understand the needs of my clients, conduct thorough due diligence on products and services, and customize the best approach for them to reach their goals.