Written by: Rebecca H. Williams, CFP®
Last Saturday, as I was running all over town trying to cram a week’s worth of errands into one day (as I usually do), I was provoked to asking myself a question that I am quite positive has crossed everyone’s mind at some point in time.
As I was unloading all of the groceries from my cart (while simultaneously trying to explain to my 5 year old son why we can’t have a lizard for a pet) the nice gentleman behind me started to engage in conversation. We introduced ourselves and after a few minutes of pleasantries, I asked him what he did for a living. “I am a Financial Adviser!” he said with great enthusiasm and pride. He gave me his card and told me to give him a call if I ever needed “good investment advice” (through all of the chaos I did not have the opportunity to mention what I do for a living).
A financial advisor. I couldn’t help but think to myself, “What constitutes a financial advisor?” Unfortunately, the term “Financial Advisor” is thrown around so fast and loose these days that it seems almost every person you meet has an uncle or some distant relative who is “in the business.” In fact, there isn’t even any specific schooling required (outside of a few FINRA licenses) in order to hold the title “Financial Advisor.” With that being said, how can you decipher one financial advisor from the next and truly understand what they do and how they do it?
In my opinion, we can really categorize a “Financial Advisor” into 3 main groups: Insurance Agencies, Broker/Dealers and RIAs.
A General Agency is type of financial services organization that is contracted with a specific insurance company and employs agents. An insurance agent must be licensed by the state’s Department of Insurance in any state in which they sell products.
But no matter what they sell, their paycheck comes from the insurance company with whom they are contracted. Most of these types of financial professionals work on a commission basis and are, quite often, highly incentivized to sell proprietary products in order to meet production requirements, receive bonuses, certain health and retirement benefits and even keep their job!
Time after time, I have seen so many instances where a product was “sold” before the “sale” even walked in the door. How can the doctor write the prescription before he has seen the patient?
A Broker/Dealer is someone who is in the business of buying and selling securities. Someone who works through a Broker/Dealer receives commissions (either embedded in the product or direct from the client) when they sell certain securities products. Sometimes these fees are completely indiscernible to the investor which leaves the inevitable question lingering “how much are they really getting paid?”
A financial professional working in such capacity will most likely hold (at minimum) a FINRA license Series 6, 7, 63 and/or 65.
An RIA, or Registered Investment Advisor, is an investment adviser that is registered with the Securities and Exchange Commission (or their equivalent state-level regulator), and is subject to the Investment Advisers Act of 1940. RIAs provide advice and services on a fee-basis and, because they are subject to the Investment Advisers Act of 1940, have an on-going fiduciary duty to act in their client’s best interest.
“On-going fiduciary duty”…what does that mean? Fiduciary duty is the legal obligation to act in another party’s best interest. On-going means that the obligation continues until the relationship is terminated as opposed to other suitability standards which only have to be justified at the time of sale.
I feel I can speak freely on these different types of financial professionals because I have personally worked as an agent of a major insurance company and I have sold security products through a Broker/Dealer affiliation.
Common questions potential investors might have, such as “Is this really what’s best for me or does it just pay you a fat commission?” “Will you still contact me after I buy this?” “Will you meet with me regularly to make sure my goals and objectives stay on course?” were the same questions that were guiding me towards finding a different way of providing financial planning services.
That is when I began working under an RIA (Ironwood Wealth Management). At last! I found a way to provide trulyindependent and un-biased advice to my families without the commission cloud looming over me.
Working on a fee-basis also allows all the cards to be “face-up.” By fully and clearly disclosing fees up front, the client knows exactly what they are paying and exactly what the advisor is making.
In addition, having our own in-house CFA charter holder (Chartered Financial Analyst®) has enabled us to keep our portfolio costs low. It may not seem too significant now, but let’s consider the effects of a mere ½ % more in portfolio fees will affect an investment of $100,000…
With a 7% compounded return over 30 years, that $100,000 will grow to $811,650. Now, by reducing the return by only 0.50% to 6.5%, the investment is only worth $699,180. That is a difference of $112,470! For just a ½ % difference in fees!
Special Needs Planning is a plan that will (most likely) cover a very long time horizon. Ensuring that the plan will not fail 10, 20, 30 even 50 years from now is crucial and fees dragging performance, no matter how small, will affect the plan’s probability of success.
When it comes to Special Needs Planning, I could not think of a better business model through which to provide services than through an RIA. Truly independent advice that is: 1. Not commission motivated, 2. Provides individualized solutions to problems in lieu of a “one-size-fits-all” approach, 3. Providing a lower fee environment as opposed to hidden, embedded fees dragging down performance, and 4. Creating trusting and lasting relationships with my families rather than a “high-five, see ya out there!”
Spending time with my families, defining goals and objectives, conducting deep data-gathering and fact-finding sessions and really getting to know my families (and more than just financially!) is critical in order to create an effective and comprehensive Special Needs Plan.
Special Needs Planning is complex and unique. It requires highly customized financial plans, creative thinking, “outside-of-the-box” planning techniques and skilled asset management strategies. It requires comprehensive planning for both short-term and long-term goals and most importantly, it requires an on-going relationship with your advisor…and one who has your best interest at heart.