Managing one’s finances is not an easy task, and not everyone is able to strategically manage their expenses and save and invest wisely. This is why opting to hire the services of a financial advisor can be a wise decision. Your advisor can not only help you manage your finances better, but also help you reach your financial goals such as tax minimization, debt management, retirement planning, estate planning, and more. However, you need to exercise caution when it comes to choosing an advisor. The advisor you choose should match your specific needs and objectives, as it can have a big impact on your financial success. This will help ensure that you do not end up paying for services that you do not require, or working with a professional who is not the right fit for your financial needs.
The financial advice that you receive should align with your goals. You can do so by hiring an independent financial advisor. An independent advisor, as the name suggests, works independently and is not associated with any particular advisory/insurance firm or financial products of a company. Generally, these advisors tend to work with a lot more freedom compared to those working for large financial firms with respect to the advice and financial products they offer, and how they conduct their business. Moreover, since the majority of independent advisors are fiduciaries, they are legally obligated to provide you the best financial advice that suits your needs.
Let’s find out more about independent financial advisors and how they differ from other advisors:
What is an independent financial advisor?
An independent financial advisor is typically a registered financial advisor (RIA) who is not engaged with any particular investment product or large financial corporation in a professional capacity. These professionals work independently thereby, offer unbiased financial advice, free from any special interests, and are not limited by certain financial products. Independent financial advisors provide unprejudiced, personalized financial advice to their clients that suits their financial situation, life goals, risk tolerance, and time horizon. As fiduciaries, independent advisors have to uphold the highest standard of care and are mandated by the law to always act in your best interests.
Who is deemed an independent financial advisor?
An independent financial advisor is not associated with any firm and works for you. He/she is registered with the U.S. Securities and Exchange Commission (SEC) or a state securities regulator and works to create a specific plan for you that meets your financial planning and investment needs. Unlike most other advisors, independent financial advisors come under the purview of a fiduciary standard where they have a fiduciary duty towards you. They are required to follow an ethical code of conduct under whose provisions they are lawfully obligated to place your interests before their own. This is not the case with a non-independent financial advisor, who is more likely to offer you biased advice that may profit him or his company personally, in the case that he hasn’t taken the fiduciary pledge.
If you take time to assess the work model of an advisor, you’d be able to figure out if the advisor is independent or not. Non-independent financial advisors are generally affiliated with large financial institutions/corporations which can affect their decisions and choices when it may come to you. Also, they have lesser flexibility compared to independent financial advisors when it comes to investing in different financial products.
Why is hiring an independent financial advisor an essential decision?
Since independent advisors or independent advisory firms are essentially concerned with their client’s best interests, you are more likely to build deeper, personal relationships during your interactions with them. In a similar vein, your advisor may hold a strong sense of accountability towards you, leading him to always work towards finding you the right investments or products to invest in.
Let’s discuss a few benefits that highlight why working with an independent advisor is important:
- Personalized advice as per your financial situation: As independent advisors are not associated with any particular firm, investment products, or funds, etc., their sole motive is to earn you maximum benefits. Their advice is free from bias and provides you with increased flexibility when it comes to managing your retirement planning, investment portfolio, or asset management, and more.
- Responsive, observant, and personal relationship: It is more likely for an independent advisor to have a more personal relationship with you compared to a non-independent advisor as they’re invested in your financial wellbeing, offering you counsel more closely aligned with your financial goals. Independent advisors conduct regular one-on-one sessions with you to find out about your investment philosophy, your short-term and long-term goals as well as being more attentive to your needs.
- Straightforward and uncomplicated fee structure: The majority of independent advisors use a fee-based method for compensation. Under this method, advisors charge their fees as a specific percentage (typically between 1 to 2 percent) of the assets under management (AUM). AUM refers to the present value of assets or investments under the direct management of the advisor which he/she invests on behalf of his/her client. Independent advisors are upfront about the terms and fees that they’ll be charging and how AUM will be calculated with respect to changing market conditions and how it will affect their fee over the subsequent years. Take an annual asset-based model for example. Herein, independent advisors usually lower their charges with the increase in the value of assets over time. In addition, in certain cases, if the asset value goal is realized, the advisors revise their AUM fee with the achievement of the goal. Since independent advisors are free from any association with any financial products or large finance firms, they make money directly from you and are not dependent on commission or referral fees from the sale of financial products. This entails that your advisor has a personal incentive to help you grow your assets and wealth as it directly improves his prospects as well. In addition, since independent advisors cannot use your assets and investments to provide benefits to another client of theirs, the level of trust tends to be higher. Moreover, at the time of hiring independent advisors, they reveal all possible areas of conflict to ensure transparency and reduce any possibilities of discord in the future.
- Nonpartisan custodian of wealth: An independent advisor is in charge of the management of your assets and all matters pertaining to your wealth. However, you can take assurance from the fact that your assets are safely and securely kept in your name by a third-party custodian which means that your money is not held by the same person who counsels you on how and where to invest it. This helps create a system of financial checks and balances offering you peace of mind. The third-party custodian sends you your monthly statements ensuring you have direct and regular access to all your financial accounts and data related to your asset management. Moreover, you have a say when it comes to choosing the custodian and can suggest one to your independent advisor.
Should you hire an independent financial advisor?
You should hire an independent financial advisor, provided that:
- You want an advisor who has complete freedom when it comes to choosing which investments to make and are free from any influence or direction from a larger financial entity.
- You want an advisor who prioritizes you and offers you honest financial advice and investment opinions.
- You want an advisor who offers you in-depth, personalized financial advice that meets your financial needs, goals, risk appetite, and investment horizon.
- You want an advisor who offers you complete and diverse opinions and advice rather than restricted by the intent to sell you particular financial products.
- You want an advisor who is happy to be compensated directly rather than through commissions or referral-based remuneration methods.
How to find out if your advisor is an independent financial advisor?
You can check whether your advisor is an independent one or not by evaluating the professional associations they are a part of. Typically speaking, independent financial advisors are affiliated with large financial firms or corporations. Furthermore, advisors working for larger financial firms are less likely to be independent advisors.
Thus, when you decide to engage the services of a financial advisor, it is advised to ask them at the time whether they are independent or not. In addition, you can check their status based on the kind of investment products they refer to you. If you’re offered a limited number of investment products to choose from, it can be an indicator that the advisor is not independent and is trying to push through his personal goals disguised as financial advice. Generally, non-independent advisors offer financial or investment products associated with their parent company which may not be bad for you per se but may also not be the most apt financial advice for your needs.
How does one go about hiring an independent financial advisor?
Before we talk about how to hire an independent financial advisor, it should be clarified that the independent advisor could both be an individual or a registered firm. Similar to independent advisors, independent investment advisory firms are not obliged to cater to any special interests. An independent advisor is free to work either as a separate entity or with an investment advisory company.
Once you’ve shortlisted an advisor that you’re comfortable with, you can evaluate if the advisor is independent or not by assessing him/her based on the following parameters:
- Certifications and licenses
- Kinds of services offered
- Types of clients and their area of industry expertise
- Written guarantee of a fiduciary duty
At the time of evaluating your financial advisor, check whether they have filed Form ADV and CRS. Financial professionals are required to file these forms as per a mandate by SEC which helps you understand the advisor’s compensation structure, ethical standards, educational background, disciplinary records, past conflicts, and more. It is also advised to vet your advisor and ask for their client references to ensure that you’re engaging with the right financial advisor.
Do consider hiring a financial advisor who has the following qualifications:
- Certified Financial Planners (CFPs): CFPs are independent financial advisors who are governed by a fiduciary duty according to the CFP Board of Standards. These professionals hold expertise in matters concerning financial planning, such as retirement, tax, estate planning, investment, etc.
- Chartered Financial Consultants (ChFCs): ChFCs are professionals who adhere to fiduciary obligations by the American College of Financial Services Code of Ethics. These professionals are also well-versed in all matters concerning financial planning.
Even though it can be said that both independent and non-independent financial advisors offer the same advice functionally, however, the quality and scope of the advice offered by both sets of advisors is different. When it comes to an independent advisor, you can be sure that you will receive nonpartisan financial advice whereas that may not be the case when it comes to non-independent advisors. Moreover, you’re more likely to get higher transparency and assurance that your interests are being prioritized if you select an independent financial advisor. You should take into account all possible considerations when making a decision to engage the services of a financial advisor.