Jonathan Dash is founder of Dash Investments. As CIO, he is responsible for the firm’s Investment Management and Asset Allocation decisions.
More than ever, people are searching for financial advice. However, the cluttered advisory landscape can be confusing when searching for the right financial advisor for you. While there may be hundreds of financial professionals in your area who present themselves as financial advisors, there is no uniform standard dictating their qualifications or how they operate. With your financial future at stake, knowing how to choose a financial advisor is one of the most important decisions you will ever make.
Understanding what differentiates the many types of advisors is key to narrowing down your choices.
Salesperson Or Financial Advisor?
The financial services industry is highly fragmented, consisting of several types of advisory models. Most advisor types work for someone else: a bank, a broker-dealer or a wire house firm. They might call themselves wealth managers, investment specialists or financial consultants. Some even have fancy titles like vice president of investments. They report to and are paid by their company to sell investment products, which presents a potential conflict of interest.
A much smaller number of advisors have no allegiance to investment firms. These advisors are independent and report exclusively to and are paid directly by their clients. They are under no pressure to sell a certain type or amount of investment products and, instead of charging commissions for product sales, they charge a fee in the range of 1% to 2% to manage your investments. These advisors are registered investment advisors (RIAs), who are bound by law to act in their clients’ best interests as fiduciaries.
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If RIAs do offer investment or insurance products, they are required to disclose all forms of third-party compensation. The problem with these “hybrid” RIAs is they can wear two hats, one as a fiduciary when advising their clients and one as a product salesperson when selling third-party investments or insurance. When acting in the latter capacity, they are held to a lower standard of care called the “suitability standard,” which means the product recommendation must be suitable for the client, not necessarily in the client’s best interest. While they must disclose which hat they are wearing to their clients, it can still pose a conflict of interest, which can muddy the advisory relationship.
What About A CFP?
There are only two types of advisors who are required to act in a fiduciary capacity when advising their clients: advisors who hold a certified financial planner (CFP) designation and RIAs.
The CFP is a recognized designation in the financial industry. After obtaining a CFP certification, a financial advisor is deemed qualified to advise clients regarding their investments, taxes, estates, insurance and retirement. CFP designees must follow a strict code of ethics in their practice, including holding their clients’ best interests above their own in a fiduciary capacity.
The key difference between CFPs and RIAs is that the former are primarily financial planners, and the latter are investment managers. Unless a CFP is also an RIA, they generally are not qualified to manage investments, and they delegate that task to professional investment managers instead.
RIAs are primarily investment managers who design and manage portfolios based on their clients’ goals and risk profiles. Many RIAs also provide retirement, tax and estate planning.
Many advisors who work for banks, broker-dealers and wire house firms hold a CFP designation. While these advisors are required to follow the strict code of ethics set forth by the CFP Board of Standards, they still work for and are paid by their companies, which can create a conflict for them.
RIAs are registered with the Securities Exchange Commission and are bound by the rules and regulations of the Investment Act of 1940. Whereas a code of ethics binds a CFP to act as a fiduciary, an RIA is bound by law.
Choosing Your Advisor
Determining which type of financial advisor is right for you ultimately comes down to knowing what you need from an advisory relationship. Considering such factors as your specific financial goals and planning needs and how much you have to invest, you can confidently make the best choice for your situation.
• I want a fully integrated, holistic financial plan. If your priority is to have a financial plan created, you’ll want to work with a CFP because that is what they are trained to do. Find a CFP who charges a flat fee for doing the plan. However, if you work with a CFP in that capacity, you may be responsible for implementing the plan (i.e., working with a CFP on tax strategies, an estate attorney for your estate plan and an investment advisor to develop an investment strategy). A good CFP can connect you with the other advisors you need to implement the plan.
• I have substantial assets that need to be invested. If your priority is to have a customized investment strategy, you should probably consider an RIA. Their role is to develop a strategy around your objectives and risk profile and build a portfolio of investments to achieve that strategy. They select the investments, monitor them and adjust the portfolio as needed to stay on track toward your objectives. Important considerations here are the fees charged, the RIA’s performance track record and whether their investment philosophy is compatible with yours.
• I prefer my financial plan and investment management to be done under one roof. It’s never a bad idea to have the person who manages your investment be intimately familiar with your financial objectives and planning needs. Choosing between a CFP or an RIA in this instance usually comes down to how much money you have to invest. Most RIAs have minimum account size requirements. Many won’t manage accounts less than $250,000 or $500,000, though some may go as low as $150,000. Anything less than that, and you will probably need to work with a CFP who can outsource your investments to a managed account.
As you look for an advisor, make sure to keep in mind how they work and what you want from the experience.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.