What Would the World Look Like Without Independent Financial Advisors?

 

9-min read.

You may have come across independent financial advisors when looking for financial professionals. Some people may believe that dealing with independent consultants is preferable to working with those from larger financial institutions, who typically have to answer to the demands and needs of larger firms. However, not all independent financial advisors will be a good fit for your financial goals.

Before selecting an independent financial advisor, clients should assess whether or not they are prejudiced and whether or not they are competent. This article will assist you in determining whether a registered investment advisor or chartered financial consultant is appropriate for your financial requirements.

Fee-based advisors can be working for clients in an independent firm, in a bigger financial advice company, or have their advisory practice. Independent financial advisors' services are often identical to those of other financial advisors employed in advisory firms. The main difference lies in the fact that independent advisors, who are equally qualified, should work in their client' best interest and offer a wide range of economic services.

This may not be the case for many advisors in larger firms who are incentivized (i.e. receive commissions) to put forward their company's proprietary products to their existing clients. Although, this can benefit investors, as we explain below. Let's find out which financial services industry professional is best for you.

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What is the definition of an independent financial advisor?

While working with an independent financial advisor usually offers more benefits than drawbacks, it's vital to understand how they compare. To begin with, independent advising firms are often owned by their in-house advisors, allowing them to develop personal ties with clients. A large, non-independent business, on the other hand, may have a less personal vibe.

An independent advisor does not have to satisfy a firm's output criteria because they operate for themselves. This may mean that they are less likely to push a firm's favored goods on you and may provide a more objective view of your financial journey. Although being influenced to recommend a particular product can still occur with independent advisors.

For example, if an advisor suggests you put more money in the stock market that you're comfortable with, through specific broker-dealers, this may not be in your best interest and they can potentially earn from it, such as getting rewarded a flat fee for every client they refer.

As the future performance of shares is uncertain in the short term, putting more money in the stock market could affect your near-term financial goals, or worse, put a burden on your budget . An unbiased financial advisor would not recommend such a risky method.

It's also worth noting that dealing with an independent financial advisor may result in less understanding of accessible financial products or restricted access to lower-cost solutions that major organizations provide. For example, many advisors in large businesses may have access to cheaper mutual funds for their clients because those products are set up in-house by the firm.

Another advantage of working with an independent advisor is that you will receive recommendations that are personalized to you and not affected by external factors. They may take more time to research, customize, and explain the investment portfolio which makes sense for your retirement planning objectives for instance.

Independent advisors typically employ third-party custodians to protect your money. This is favored since there is no conflict of interest, instead of having your financial advisor hold your assets at his or her firm. Working with a non-independent broker-dealer who owns your assets at the same financial institution, such as Charles Schwab or Fidelity, may appeal to some clients, however.

A disadvantage of dealing with an independent financial advisor is that you may have fewer alternatives for qualified financial specialists with particular skills. Larger, non-independent firms, for example, may have a multitude of advisors that specialize in estate planning, ETFs, retirement, or other particular requirements.

What qualifies a financial advisor as "independent"?

A financial advisor assists customers with a wide range of personal financial planning and investing requirements. In many situations, they collaborate with clients to create investment policy statements that define a client's risk tolerance, financial status, time horizon, and other information that might assist financial professionals to work with the client appropriately and efficiently. These services are widely regarded as the gold standard for all financial counselors, whether independent or not.

To tell an independent advisor from a non-independent one, look at who owns the company and whether they're directly associated with other (usually bigger) advisory firms. A firm's independence is closely tied to these attributes, as a connection with another business or even a broker-dealer might change how a financial advisor works with a client.

Independent consultants and firms operate fully on their own, which frequently provides them greater freedom to work how they want to, and select varied investment vehicles.

How to determine whether a financial advisor is independent?

Asking your financial advisor or their firm if they are independent is the easiest method to find out. However, it is not difficult to determine on your own. Because independent companies and advisors are not associated with bigger institutions; well-known fee-only advisors are unlikely to be independent. Even a registered representative of a bigger firm is not truly autonomous.

When looking for an independent advisor to work with, be aware of those that only provide a restricted selection of financial products. If you see this, it's a red flag that your adviser may not be truly independent, or is being rewarded for selling you specific investments on behalf of another firm.

Non-independent advisors frequently provide products linked to their parent organization, such as investment funds and insurance coverage, and the support services associated with them. While this isn't always a negative thing, as it could mean lower costs, for example, an independent financial advisor may have a more comprehensive range of services.

On the other hand, an independent firm or advisor may have less knowledge of the constantly evolving financial world, such as complex retirement planning regulations. A larger firm would have more advisors and back office support to remain updated with financial planning rules.

Questions to ask before hiring an independent advisor

You should ask an independent financial advisor several questions before working with them to verify that they're a suitable fit for you and your financial objectives. These are some of the questions clients can ask:

●       What are your qualifications?

●       Do you act as a fiduciary?

●       Are there any potential conflicts of interest that I should be aware of?

●       Do you charge a fee?

●       How do you profit from the financial goods you provide?

●       What are your areas of expertise?

●       Aside from portfolio management, what other services do you provide?

●       How do you track progress toward financial objectives?

●       What is your approach to investing?

 

Working with an individual advisor can be advantageous since you can receive intimate, tailored advice that you may not receive from advisors at larger firms.

If you're thinking about hiring an independent financial advisor or even looking at fee-only financial planning, keep in mind that this doesn't always imply they'll be objective. Ask precise inquiries ahead of time to ensure you're making the appropriate decision for your money.

Various types of advisors

Financial counselors are not usually referred to as such. Instead, they are sometimes referred to by their specialty, such as "mortgage advisors", "investment advisors", or "pension advisor".

They can also be referred to as 'brokers', especially when dealing with items such as mortgages, house and auto insurance, and investments such as stocks or options.

All registered financial counselors are required to have certain credentials. Most will have met higher standards, such as the Chartered Financial Planner or Certified Financial Planner designations. This implies they must observe certain guidelines while interacting with you.

Money managers, investment consultants, and financial planners are regulated in the United States as “investment advisers” under the U.S. Investment Advisers Act of 1940 or similar state statutes. The SEC regulates an investment adviser managing more than $110 million in clients' assets. Advisers with up to $100 million of assets under management are subject to their state's securities regulator instead.

They may also have specialized credentials in areas such as long-term care, equity release, and pension transfers. You can get background information on both SEC and state-registered investment advisers by using FINRA BrokerCheck.

Most advisors will provide you with a free introductory consultation. This allows you to determine whether you're comfortable with them and how they function. If you ask, any fully certified counsel will show you their certifications.

Financial advisors: independent vs. non-independent

The ability to work independently, without influence, oversight, or restrictions from a bigger institution, distinguishes an independent financial adviser from a non-independent advisor. Non-independent financial advisors are sometimes obligated to offer securities and other financial products through a certain firm. This restricts the suggestions they may make to clients.

On the other hand, advisors in non-independent companies will likely have access to more research resources than those at smaller independent firms. Although this does not always imply superior investment performance, having the support of a large business has its advantages.

Fee schedules are another area where independent and non-independent companies may differ. Many independent advisors are fee-only, which means they are paid only client advice fees and do not generally get commissions from other companies for selling their investment or insurance products, in theory giving them more independence.

Commission-based advisors, on the other hand, do receive the aforementioned commissions. Because of their association with a larger business, a non-independent adviser may be more likely to collect such rewards and hence be encouraged to advocate such transactions.

If this distinction between fee-only and commission-based is essential to you, ask the counselor with whom you are considering working.

How to find a financial advisor

An independent financial advisor can assist you in planning, saving, and investing for retirement. Finding a competent financial advisor does not have to be difficult.

When settling on a financial advisor, make carefully examine both fee-only and fee-based financial advisors. While fee-based advisers might charge commissions and other third-party payments in addition to client-paid fees, fee-only advisors only generate money from their services.

 

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The Importance of licensed independent advisers

Here are some ways that such experts might benefit your financial life.

Expertise

Regardless of the complexity of your financial requirements and aspirations, an advisor can assist you in developing a customized game plan that considers both the big picture and the minutiae. Some financial advisors specialize in certain investing techniques, whilst others provide broad solutions to their clients. They can assist you with anything from estate planning to tax savings, charity giving, inheritance, and stocks.

Financial Objectives

You have your own financial goals, which the advisor will help you plan for and attain. However, the primary purpose of such a financial counselor is to organize your finances. Once they have done so, you may decide to set newer and greater objectives for yourself, knowing that you will have the support of reliable financial advisers.

Accountability

Such financial advisors sometimes strive to establish a personal relationship with you to better serve you. This also helps them better grasp your demands and life goals. Their degree of accountability is high since they are entrepreneurial and devoted to the improvement of your portfolio.

Transparency

Independent financial advisors typically charge a fee for their services. It is straightforward, clear, and beneficial to the growth of your assets. With this arrangement, you can be confident that their business will thrive if yours does. As a result, there is financial and service transparency between the two parties.

Convenience

You won't have to manage your portfolio if you employ a financial advisor. Their investing advice will put you in auto-transaction mode, where you will just follow their instructions and act. The same is true for other financial problems. This would save you a significant amount of time, energy, and effort.

In conclusion

When it comes to hiring someone to assist manage your money and prepare for your financial future, an independent financial advisor is frequently the best option.

As discussed in the first half of this article, while independent and non-independent advisory services may be functionally comparable, the quality and breadth of counsel you're likely to receive from an independent adviser may put you ahead.

With no outside forces pressing independent advisors to promote specific goods or operate in a certain way, clients can be confident advisors are acting in their best interests.

Get in touch with a financial professional today and take control of your finances!

Contributor: Gabriel Pisasale

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