How to Identify a Real Financial Advisor
There are financial advisors, investment advisors, money managers, financial consultants, financial planners, retirement planners, and investment representatives. All of them want to invest your assets in securities and products. Titles should not matter, but in this case they are a major source of risk for investors.
Your best bet is a financial advisor, but how do you separate real financial advisors from charlatans who claim to be advisors to gain control of your assets.
Registration
Step one is to check the registrations of the financial professionals who want to sell you investment advice and services. Real financial advisors are Registered Investment Advisors (RIAs) or Investment Advisor Representatives (IARs) who work for RIAs. This critical registration permits these professionals to provide financial advice and ongoing services for fees. Representatives who do not hold these registrations are limited to selling investment products for commissions. They are not allowed to provide advice or ongoing services.
Fiduciary Status
Step two is determining the fiduciary status of the financial advisor. Real investment advisors are willing to acknowledge their fiduciary status in writing. Why is fiduciary status so important? Fiduciaries are held to the highest ethical standards in the financial services industry. They are required by law to put your financial interests ahead of their own. This means they cannot sell you the product that makes them the most money unless that product produces competitive performance for reasonable risk and expense.
Method of Compensation
As I mentioned under Registrations, RIAs and IARs are compensated with fees for their knowledge, advice, and services. There are three types of fees. Hourly fees and fixed fees are usually charged for planning advice and services. Asset-based fees are usually charged for investment advice and services. If the person who wants to sell you investment products cannot be compensated with fees, then that person is a sales representative and not a real financial advisor.
Services
One source of confusion about advisor roles is their services. For example, a real financial advisor provides investment advice. A sales representative provides investment recommendations. Do you know the difference between advice and recommendations? That’s ok, no one does. Following are a few of the services that are provided by real advisors: Investment Policy Statements, Asset Allocation, Manager Selection, and Performance Reports. The advisor may or may not make investment decisions for you. That depends on your willingness to give the advisor discretion (decision-making authority) over your assets.
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