The financial services industry employs a mix of professionals, such as financial consultants and financial advisors, who use titles interchangeably to guide people on how to invest their money for retirement. These securities can be confusing for investors when hiring someone to manage their assets.
“The financial services industry has a long history of playing on semantics with titles aimed at financial professionals,” says Daren Blonski, managing director of Sonoma Wealth Advisors in California.
Industry regulators, trade associations and consumer groups have fought over what finance professionals should be allowed to call themselves. The financial services industry has long used titles to shape consumer perception. “Looking beyond the title is key to understanding the structure of your relationship with a financial advisor or consultant,” he says.
Blonski adds, “If they’re not willing to serve you as a trustee, then what they’re calling doesn’t make sense and you should leave.”
What is a Financial Advisor?
Financial consultants typically help clients see their blind spots, such as understanding the repercussions of withdrawing money from an Individual Retirement Account before you turn 59.5 or the consequences of making emotional decisions, says Shehara Wooten, certified financial planner and founder of Your Story Financial. , based in Dallas. “We help people remove what’s blocking their view,” she says.
Some people will hire a financial advisor to solve an immediate financial problem, such as when they inherit money from a family member.
“There’s no official definition of what a consultant or financial advisor can provide,” says Sally Brandon, senior vice president of client services at Rebalance IRA in Palo Alto, Calif.
Since the industry doesn’t have an official definition, it’s more important to hire someone who is a fiduciary, meaning they act only in your best interests, Brandon says. Working with a certified financial planner, or CFP, is a good idea because that person has taken the extra steps to receive their certification and it “shows their knowledge, expertise and commitment,” she says.
Financial consultant versus financial advisor
The key to determining if a financial consultant is the same as a financial advisor is to examine their credentials and whether they have a CFP or Chartered Financial Analyst (CFA) designation, says Charles Sizemore, Chief Investment Officer of Sizemore Capital Management, a Dallas firm. registered investment adviser. A consultant’s role can vary, and that person can provide planning advice, serve as something like a financial “life coach,” actively manage an investment portfolio, or any combination of these roles, Sizemore says.
Insurance brokers and agents have called themselves advisors in the past, but they can’t charge fees and should only be compensated by commissions, says Bill DeShurko, president of 401 Advisor, a registered investment adviser in Centerville, Ohio.
A recent requirement from the United States Securities and Exchange Commission called Regulation Best Interest states that as of June 30, 2020, a consultant and an adviser are not the same thing. A dealer or commission-based representative can no longer use the term “advisor” or “advisor”. The only people who can use the term are those who are registered with the SEC or with a state as a registered investment adviser, known as an RIA. Beware of experts who offer “free” financial planning, says DeShurko. The plans they have drawn up are “distorted to show insurance needs or exaggerate the tax advantages of annuities since they are usually high commission products to pay for their ‘free’ advice”.
How to determine when to seek financial advice
Some people seek out a finance professional when they have longer-term goals, such as buying a home or saving for college tuition, says Zehra Candler, wealth manager at Genesis Wealth Management in Tampa, Florida. People who don’t have a lot of assets or don’t want to pay for ongoing advice can turn to Certified Financial Planners, where they can pay a one-time fee to receive a plan and recommendations.
When to hire a financial consultant or advisor depends on the amount of money you need to invest. Younger people who are just starting to invest in a 401(k) plan might find hiring an advisor unnecessarily expensive, Brandon says. People may find hiring a financial advisor beneficial if they are working on their second or third job, have previous 401(k) balances or IRA accounts, and have other goals such as caring for their parents. aging or other financial concerns in addition to retirement. , she says.
People who are willing to research investment and tax concepts and who have a fairly straightforward financial situation might not need a consultant, Sizemore says.
Having a good consultant can be “really instrumental in getting your retirement planning off to a good start, even if you have few assets to invest,” he says. “The bigger your nest egg, the more important good advice is, because any mistake becomes much more costly.”
People who are just starting to invest in their retirement will find that there is no shortage of online tools and apps to get started. A consultant can help investors manage a portfolio or review current holdings, says Keith Huber, managing director of retail sales at E-Trade, an Arlington, Va.-based brokerage.
“The role a financial consultant can play is particularly relevant at times like these when investors may be subject to emotional decision-making,” he says. “Financial consultants can help you plan your investments to weather the storm and stay the course when times get tough.”
Expect to pay fees
While some investment advisors receive commissions for selling products, others are paid as a percentage of total assets. Hiring a financial planner could be helpful, as they can lay out a financial roadmap to help people early in their careers, Brandon says. “You can come back to it when you get married, have kids, buy a house, or advance your career,” she says. “Financial planners are generally paid by the hour. We recommend that you stay away from someone who earns a commission by recommending a specific mutual fund or stock, because you don’t know they are acting in your best interest.”
One of the main ways to tell if you have a broker or an advisor is to find out how they’re paid, says Ron McCoy, CEO of Freedom Capital Advisors in Clermont, Fla. Brokers make money by charging a commission or markup, which can be hidden from unsuspecting clients. “Free does not exist,” he says. “You’re going to pay somewhere along the line and you have to know the difference.”
A financial adviser who is a fiduciary has a duty to put your interests first and receives an adviser fee, usually based on account value. “It allows the advisor to monitor the client’s interest, and clients can see charges up front and nothing is hidden,” he says.
Some consultants are paid hourly in the same way as a lawyer or certified public accountant, or they may receive a flat fee, Sizemore says.
This is appropriate if the role of the consultant is to serve as a financial planner. If the consultant does ongoing portfolio management, they will usually be paid as a percentage of assets under management, which is often around 1% per year. In the traditional brokerage model, a consultant may receive a commission for the sale of a mutual fund or annuity, although this model shrinks.
Why paying for financial advice is valuable
While most investment decisions can be reduced to fairly simple rules of thumb, such as reducing your exposure to stocks as you age, sometimes people just need a sounding board. “You may do some research and believe you’re on the right track, but an experienced professional can help you find potential landmines and usually keep you out of trouble,” Sizemore says.
Research has shown that people often misjudge their own ability to withstand market ups and downs and overestimate their tolerance for risk, Brandon says. Or they underestimate it and stay in thankless investments for long periods of time. “Good financial advice helps clients understand who they are, how long they need to invest, and what combination of investments will allow them to achieve their long-term goals at the lowest acceptable level of risk,” she says. “Having an advisor has been shown by Vanguard to actually add return to your investments precisely by deterring you when markets get tough. Vanguard puts that figure at around 3%.”
Market volatility can make investors wary, but a good advisor can help you weather it, says Haleh Moddasser, a partner at Stearns Financial Group in Chapel Hill, North Carolina. “Behavioral finance is one of the biggest causes of financial failure,” she says. “That’s when people panic and sell low or get greedy and buy high. It helps to have someone talking to you from the ledge.”
Many people don’t spend enough time on potential mistakes that can derail their financial life, like buying a vacation home they can’t really afford, retiring too soon, or coming to terms with a financial settlement surrounding divorce. without understanding or considering the long term. implications, says Moddasser.
“These issues often overshadow a perfectly sound investment strategy,” she says.