Most investors are not aware there are financial advisors and sales representatives (reps) who have very different services, agendas, and business practices. You can blame sales representatives for the confusion. Most of them refer to themselves as financial planners or financial advisors because they know investors do not want sales reps investing their assets. If they disclosed their real status, they would lose sales.
Following are five tips that will help you quickly and easily determine who are the real financial advisors and who are the sales representatives who are masquerading as advisors. Make sure you select a real advisor by requiring documentation for the following information.
Licensing & Registration
Sales representatives hold a product license (Series 6) that permits them to sell mutual funds or a general securities license (Series 7) that permits them to provide a full range of investment products. The licenses permit the reps to make investment recommendations, but not provide investment advice.
Real advisors are registered as Investment Advisor Representatives. This registration permits them to provide financial advice and ongoing financial services.
Sales reps are held to a lower ethical standard called suitability. That is, they are supposed to make suitable recommendations when they sell investment products. Suitability is a deliberately vague standard that varies by investor and is difficult to enforce.
Real advisors are financial fiduciaries who are held to a much higher ethical standard that requires them to put investors’ financial interests ahead of their own.
Method of Compensation
Sales reps’ only method of compensation is commissions from the sale of investment and insurance products.
Real advisors are compensated with one or more of three types of fees: Asset-based, hourly, or fixed. They usually charge asset-based (percent of assets) fees for their investment advice and services. They may charge hourly or fixed fees for their planning and tax services. Some advisors also receive commissions.
Sales reps rarely provide any type of documentation for their credentials, ethics, business practices, or compensation. They prefer verbal information so you have no written record of what was said to you. No record puts more emphasis on their personalities and sales skills, which have nothing to do with competence and trustworthiness.
Real advisors practice transparency that is backed up by documentation. You don’t have to take notes and remember years later what was said to you when advisors document key facts that impact your selection decisions.
Sales reps frequently restrict your investment choices to products that are produced by their companies (broker/dealer, bank, insurance company) or third parties who pay fees to be recommended by the companies. Either way your choices are restricted to products that may not be best in class.
Higher quality advisors provide open architected solutions that do not restrict your choices.