Managing your finances can be a challenging process. However, a financial advisor can help make it less daunting. Your financial advisor can help you manage your money and achieve your financial goals, such as tax minimization, debt management, retirement planning, estate planning, and much more. However, it is important that you choose an advisor that suits your specific needs and goals, as this can impact your path to financial success. By doing so, you can be assured that you are not paying for services you do not need or working with a professional who is not an optimum fit for your financial situation.
If you want to be sure that the financial advice you get is aligned with your goals, consider hiring an independent financial advisor. An independent financial advisor is a professional who is not tied to a particular insurance/advisory firm or proprietary products of a firm. Typically, these advisors have more freedom than other advisors who work for large financial institutions with regards to the advice and financial products they offer and how they operate their business. Moreover, most independent advisors are governed by the fiduciary standard, which means they are lawfully obliged to provide the best financial advice as per your needs.
Here is all you need to know about independent financial advisors and how they are different:
What is an independent financial advisor?
An independent financial advisor is a registered investment advisor (RIA) that is not tied to a particular investment product or large financial corporation. These advisors can be investment advisory firms or individual professionals offering financial advice. Since these professionals work independently, they are not constrained by any special interests, limited by particular financial products, or biased in their financial advice. The main aim of independent financial advisors is to provide personalized financial advice to their clients, many of whom might have complex needs. The counsel these professionals provide is unbiased and suited to your financial situation, life goals, risk tolerance, and time horizon. As fiduciaries, independent financial advisors are held to the highest standard of care and are mandated by the law to act in your best interest at all times.
Who is considered an independent financial advisor?
An independent financial advisor works for you and not for a firm. Generally, these advisors are either registered with the U.S. Securities and Exchange Commission (SEC) or the state securities regulators. Independent advisors work with you to create a tailored plan as per your financial planning and investment needs. They effectively engage with you to understand your financial situation, risk tolerance, time horizon, and life goals. This enables them to provide advice that is customized to your requirements.
Unlike most other financial advisors, independent advisors are governed by a fiduciary standard. This means that they are liable to put your needs before their own. They have a fiduciary duty towards you. They follow an ethical code of conduct and hence, are lawfully obligated to act in your best interest at all times. However, a non-independent financial advisor, who is not under the fiduciary pledge, can likely offer biased advice to fulfill their individual or company gains.
You can differentiate an independent financial advisor from others by assessing their work model to see if they are directly affiliated with large financial corporations. Affiliation with a large corporation could affect how an advisor works with you. Independent financial advisors work on their own and have more flexibility in how they operate. Moreover, these professionals work effectively to minimize disputes and ensure transparency in their services.
Why is it important to hire an independent financial advisor?
Independent financial advisors or independent advisory firms are actively involved in helping their clients. Hence, when you engage with them, you are more likely to forge deep, personal relationships. The advisor will potentially hold a strong sense of accountability towards you. Moreover, if your financial needs are complex and if you prefer personalized advice, it is recommended that you engage with an independent advisor.
Here are some of the benefits that highlight the importance of working with an independent financial advisor:
- Personalized guidance as per your holistic financial situation: Independent advisors are not linked to any organization, investment products, or funds. So, the guidance they provide is solely driven to provide you maximum benefits. Be it in terms of your retirement planning, investment portfolio, or asset management, independent advisors have a wider choice, more flexibility, and offer their advice based on what is best for you without being influenced by external factors.
- A responsive, attentive, and personal relationship: Your independent advisor will likely have a more personalized relationship with you as compared to a non-independent advisor. This enables the advisor to offer customized counsel closely aligned with your financial goals. The independent advisor will aim to build a strong understanding of your financial situation. Hence, they effectively engage with you to build deeper relationships. Independent advisors hold regular, ongoing interactions with you. They are attentive to your needs and are more responsive in offering their services. In most cases, since independent advisors are entrepreneurial business owners, they hold themselves personally accountable for your financial services.
- A transparent and simple fee structure: Most independent advisors charge you as per a fee-based method. Under this method, advisors levy their fees as a specific percentage (usually between 1% and 2%) of the assets under management (AUM). Assets under management refer to the present market value of the assets/investments that the advisor directly manages and invests on your behalf. Independent advisors specify their terms and fees before the engagement begins. They also clearly disclose how AUM will be calculated under different circumstances and how the fee will change over the years. In an annual asset-based model, independent advisors often reduce their charges as the value of your assets increases over time. In some cases, these professionals set a benchmark that lists the change in AUM fee percentage if an asset-value goal is attained. Independent advisors are not associated with any financial products or large corporations, which means they earn directly from you and do not rely on commissions or referral fees from the sale of financial products. This means that your advisor has an incentive to help you grow your assets and wealth. If you prosper, your advisor also prospers. Moreover, because these advisors cannot use your assets and investments to benefit another client, the element of trust is higher. Further, independent financial advisors disclose all possible areas of conflict at the start of the engagement to ensure transparency and minimize any chances of discord in the future.
- An independent custodian of your wealth: An independent advisor directly manages your assets and related wealth matters. However, your assets are safely and securely held in your name by a third-party custodian. This means that your money is not held by the same person who advises you on how to invest it. This creates a more reassuring system of financial checks and balances. Your monthly statements are directly sent by the third-party custodian. Moreover, even though your primary relationship is with the independent financial advisor, you have direct and constant access to all your financial accounts and asset management data through the third-party custodian. You may also choose the custodian you want your independent advisor to opt for.
Should you engage with an independent financial advisor?
You should engage with an independent financial advisor, if:
- You want a professional who can completely operate on their own, without any influence or direction from a larger financial entity.
- You want an advisor who offers you direct and honest financial advice and investment opinions, keeping you as a priority.
- You want deeper and more personalized financial advice that directly aligns with your financial needs, goals, risk tolerance, and investment horizon.
- You prefer holistic and wide variety-based counsel rather than restrictive opinions ruled by an intent to sell you specific financial products.
- You want to compensate your financial advisor directly rather than adopt commission or referral-based remuneration methods.
- You want to have direct access to your assets instead of relying on your advisor or a larger financial corporation holding your assets.
How to know if your advisor is an independent financial advisor?
The best way to know if a financial advisor is independent or non-independent is to check their professional associations. Generally, independent advisors are not affiliated with larger financial institutions or big brand names. Moreover, professionals registered with representatives of larger firms are not likely to be not independent.
Hence, when working with a financial advisor, it is advisable to ask them upfront if they are independent or not. You can also assess their independence based on the investment products they offer you. If your advisor gives you a restrictive number of investment products, it could be a sign that they are not independent and could be trying to push their personal goals through disguised financial advice. Non-independent advisors usually offer products that are promoted or linked with their parent company. While this might not be bad for you, it may not be the most suitable financial advice for your needs.
How to hire an independent financial advisor
An important thing to keep in mind when hiring an independent financial advisor is that the professional can be an individual or a registered firm. Investment advisory firms are similar to independent advisors and are not obliged to any special interests. An independent advisor can choose to work with an investment advisory firm or as a separate entity. To find a vetted fiduciary financial advisor, you may also use tools such as WiserAdvisor’s advisor match service that connects you to 1-3 top pre-screened financial advisors. These advisors are assessed on their experience, compensation arrangement (fee-based or fee-only), licensing, and disclosures.
Once you shortlist the advisor, you can analyze the advisor to know if they are independent or not. You can evaluate the expert on these parameters:
- Certifications and licenses
- Services offered
- Types of clients and industry expertise
- Written guarantee of a fiduciary duty
When assessing your financial advisor, check Form ADV and CRS. SEC mandates financial professionals to file these forms. These forms help you understand the advisor’s pay structure, ethical standards, educational background, disciplinary records, past conflicts, and much more. It is also advisable to do a background check and ask for client references to be sure you are engaging with the right financial advisor.
When looking for an independent financial advisor, consider opting for the following designations:
- Certified Financial Planners (CFPs): You can hire an independent financial advisor who is a CFP. These advisors are governed by a fiduciary duty as per the CFP Board of Standards. These professionals hold expertise in financial planning areas, such as retirement, tax, estate planning, investment, etc.
- Chartered Financial Consultants (ChFCs): You can also consider engaging with a ChFC who is under a fiduciary obligation by the American College of Financial Services Code of Ethics.
The final word
On a broader scale, independent and non-independent financial advisors might offer the same advice functionally. However, the quality and scope of counsel provided by both parties are different. With an independent advisor, you can be sure to receive unbiased advice as per your financial interests. With a non-independent advisor, you are more likely to receive biased financial advice. There is also higher transparency and assurance of your best interest when engaging with a professional independent financial advisor. It is important to consider all aspects and make an informed choice before making a decision to hire a financial advisor.
For further clarification on the most suitable financial advisor for your needs, visit Dash Investments or email me directly at firstname.lastname@example.org.