You might want to work with a financial advisor because you want help with investments, insurance, or other planning. Large companies often employ financial advisors, but you can also work with an independent financial advisor who doesn’t work for a bank or broker.
For You: 7 Reasons You Should Consider a Financial Advisor — Even If You’re Not Wealthy
The biggest perk of working with an independent advisor is that there is less conflict of interest or incentive to sell certain products. Here’s what you need to know.
What Is an Independent Financial Advisor?
An independent financial advisor is similar to any other type of financial advisor — the advisor provides clients with financial advice, recommendations and products. The primary difference is that independent financial advisors don’t work for a large corporation or bank. Instead, they are usually self-employed.
It might seem like an advisor’s employment status doesn’t matter, but the truth is that it can significantly impact fees, recommended products and commission. For example, advisors working for a large bank must sell bank-specific products and might be limited in their recommendations.
On the other hand, independent financial advisors usually have more freedom and are less likely to be rewarded for recommending specific products. Both types of advisors can have different fee structures, usually fee-based or commission-based.
Depending on how the advisor earns money, independent financial advisors might still have commission-based incentives to recommend specific products, so it’s best that you familiarize yourself with the payment structure and ask questions.
Key Characteristics of an Independent Financial Advisor
You won’t be able to find a list of independent financial advisors since there’s no specific designation for the role. However, there are particular characteristics you can look for as you search for an independent advisor. Here’s what to consider.
Fee-Only
Independent financial advisors can set their rates and earning structure. Because of that, some charge a flat fee while others partner with financial companies to earn a sales commission on products. Working with a fee-only advisor helps confirm that there aren’t any conflicts of interest or sales tactics.
Fiduciary
You want to ensure that an independent financial advisor is a fiduciary. A fiduciary manages someone else’s money for the owner’s benefit, not their own. Registered investment advisors are fiduciaries, but brokers and other money managers aren’t. Confirming if an advisor is a legal fiduciary can help determine independent financial advisor status.
Financial Designations
Independent financial advisors often have one or more of the following designations: chartered financial analyst, certified financial planner or registered investment advisor. Independent financial advisors aren’t required to have any of these designations. Still, it can help you determine who might be a good fit.
Self-Employed
Most independent financial advisors are self-employed and don’t work for a large financial organization. Asking about employment status, including commission-based employment, can help you determine if an advisor is independent.
Why Choose an Independent Financial Advisor?
Working with an independent financial advisor has many important benefits, including lower costs. Here are the biggest perks of choosing an independent financial advisor.
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Less incentive to sell: Independent financial advisors have less incentive to sell commission-based products since they don’t work for a large financial institution.
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Fee-based costs: They’ll use flat fees instead of commissions from selling, saving you money int he long run.
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Tailored financial advice: Independent financial advisors offer unbiased recommendations, tailor-made to your needs.
How To Choose the Best Independent Financial Advisor
The best way to choose an independent financial advisor is to ask questions and vet an advisor before working together. The following tips can help you find the best independent financial advisor.
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Ask about fees: Asking about fees is one of the best ways to determine if an advisor is independent. Fee-based advisors are usually fiduciaries who don’t work for a large company with commission-based products. It’s not always the case, but it can be a helpful question.
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Research the advisor: The Financial Industry Regulation Authority is authorized by Congress to protect investors. You can check FINRA’s BrokerCheck database to research the background of advisors, firms, and brokers. You can find information about licensing, fees, and legal action.
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Clarify what you need: If you want to work with an independent financial advisor, it’s important to tell potential advisors about what you want. Ask questions, communicate what you need help with, and gather information before moving forward.
Common Misconceptions About Independent Financial Advisors
The biggest misconception about independent financial advisors is that all advisors are the same. The truth is that there are many types of financial advisors, including fee-based, fiduciary, brokers and more.
There isn’t a specific designation that confirms an advisor’s status, so it’s important that you do your own homework and ask the right questions so you can find the right fit.
It can be challenging to find an independent financial advisor who meets your needs, but it’s usually worth the effort. Once you find the right fit, you can work together for decades.
Final Takeaway
Independent financial advisors don’t work for a large bank or financial institution. Because of that, independent advisors might be under less pressure to sell certain products or investments. You can check an advisor’s credentials, ask questions and focus on fee-only fiduciaries to find the best independent financial advisor.
FAQ
Independent financial advisors might be able to offer tailored financial advice without influence from an employer. Here are answers to common questions about independent advisors.
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What does an independent financial advisor do?
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Independent financial advisors can advise on various topics, including investments, budgets, insurance, retirement projections, tax plans and debt management. You can work with an independent financial advisor to create a plan and achieve your money goals.
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How much does an independent financial advisor charge?
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Independent financial advisors can charge an asset-based fee rate or a flat fee. Most asset-based fees are a percentage of your investment balance — typically 1% or 2%. Advisors who charge a flat fee can set their rates and might charge hourly or per package. Always ask about fees and request the answer in writing to reference it throughout the process.
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Are independent financial advisors worth it?
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Independent financial advisors can be worth it, depending on what you hope to accomplish. If you need to create a financial plan or get specific advice about a money topic, it can make sense to pay for an advisor. But it’s important to consider the cost of the service and if it makes sense to spend money on it right now.
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This article originally appeared on GOBankingRates.com: What Are Independent Financial Advisors?
