Once you've decided it’s time to get some professional financial help, you may be asking yourself: “Which type of financial professional is best for me?” Differentiating between a "financial advisor", an "investment advisor", and a "financial planner", among other titles, is difficult. While “consumer use of financial advisors has increased significantly in the last five years” according the CFP® Board,1 clarity about what type of advisor one needs has not increased. You may have asked yourself "what's in a title", and whether there are other areas to distinguish between financial professionals. Well, I will address a few of the issues in this complex area.
When advisors were surveyed about the benefits of cash flow management and budgeting, nearly 100 percent of them stated that their clients became more confident and secure about their financial futures after utilizing the service.2 However, not everyone knows where to turn to seek the kind of advice they need. Before you make a final decision, we've summarized a few of the titles, approaches, and designations. We have also included a list with links of where to find the different types of advisors.
Differentation #1: Titles? Titles Have Little Meaning
There are a wide variety of names that firms or advisors use, and there is no one set meaning or obligation behind the term. While one would think that the industry would limit the use of certain titles, this is not in fact done. The terms are used more for marketing or branding purposes rather than clearly establishing the services provided, the issues addressed, the level of fiduciary responsibility, the type of compensation, or the level expertise. Just like the use of Senior Vice President, Senior Executive, or Chief Bottlewasher, the titles do not always indicate a legal obligation or have a consistent meaning.
Let's take a look at the more common titles that are often used in the industry and which don't truly define much about the advisor: financial advisor, financial consultant, financial planner, wealth advisor, and wealth manager. (Side note - there is no difference between "advisor" or "adviser" as far as the common usage or regulations are concened. I will use "adivsor" for discussion purposes.) These advisors may cover a range of financial issues in an integrated manner or they may be more narrowly focused on investment advice or providing and selling insurance solutions. They can be brokers that are not held to a fiduciary standard (think Series 7 and commissions) or they may be independent advisors that are held to a fiduciary standard (Series 65 and no commissions). Advisors with these titles may have certain credentials, or they may not have any credentials and no college degree. There is not one defined client segment that these advisors serve. They may work with all high net worth clients, middle America, the debt-challenged, the recent graduate, or a combination. Needless to say, you just can't go by the title to determine whether the advisor is a good fit for your needs. (Similary, when someone says they "do financial planning", that can mean a lot of different things.)
Other titles may have a more narrow meaning, but this is not necessarily the case. Some titles that are often associated with the more narrow field of managing investments include investment advisor, investment manager, portfolio manager, or investment executive. However, some investment advisors or managers may touch on other tangential financial issues as well. A portfolio manager is often the title given to someone that manages trust investment portfolios, but this is not always the case. Another title that does have a bit more meaning is that of an "Investment Counsel". One can only use this title under the Investment Advisers Act of 1940 Act ("'40 Act") if their "principal business consists of acting as investment adviser", among other obligations. I have not seen too many professionals use this term, but it is generally used by one that is solely focused on giving investment advice without addressing other integrated planning issues such as tax planning, detailed retirement analysis, etc.
When you see the term "wealth" in the title name, you may often think of higher net worth clients. While this may be the case and is often the term used in private banks, this, too, is used inconsistently. Someone working with clients straight out of college may have the title Wealth This or Wealth That. This word in a title means very little.
At Oasis Wealth Planning Advisors, our advisors use the title Wealth Planning Advisor. We did this to attempt to describe how and who we work with. First, "Wealth" is meant to describe our ability and willingness to work with higher net worth clients, but "Planning" is meant to indicate that we also work with Middle America that appreciates the value of our planning-centric approach. "Wealth" has no legal meaning and certainly is no guarantee that we have expertise in this area. We have "Planning" in our titles because we are a financial planning-focused firm and do not merely focus on investment management in isolation. We use the term "Advisor" in our titles because advice is at the heart of what we provide. We don't get commissions and don't act in a one-time transactional fashion to sell product. However, many "financial advisors" do receive commissions and may act more as transactional agents -- again, these terms really have no legal meaning as to the true level of advice or level of expertise. (When I was employed at a national private bank, I had four different titles during my career despite having the same role and responsibilities during that term.)
To understand what your prospective advisor addresses, review their website, ask them questions, and pay attention to the questions they are asking you. Their presentation meeting should be a big clue of how they work with clients. If they jump right away to a particular product, they are likely commissioned advisors that are more focused on selling investment products. If they are focus more on asset allocation and what stocks and bonds you own, they are likely more focused on investment advice or selling investment product, If they take a bit longer to try to understand your overall situation, including your family structure, your goals, your tax situation, your current expenses versus your savings, and other matters, they may cover address issues more holistically (but not necessarily as it may be window dressing).
Speaking of compensation, financial advisors can be compensated in a variety of ways - they can be commission-based, fee-only, or a hybrid. While there is not one right approach, this is arguably a better way to help you to determine what type of advisor you want to work with.
Differentation #2: Level of Care (Fiduciary or Not) Owed and Compensation Method
Financial advisors - or whatever you want to call them - act as either brokers regulated by FINRA having passed the Series 7 or act as independent advisors that operate under the Investment Advisers Act of 1940 ("'40 Act") and are regulated by the SEC or state securities bodies. I'll address both the level of care and type of compensation in this section as they are generally related.
I must note that while there is one type of advisor I would generally recommend a friend or family member retain if I did not know the individual advisors involved, the following discussion is not to suggest there is just one right way of providing financial services. I know many brokers that are knowledgeable, are trustworthy, and generally strive to do what is best for their clients, and I would not hesitate to send friends or family to them. The most important thing in selecting an advisor to work with is to understand the type of advisor you may be working with - what motivates their advice, what expertise do they have, and what is their level of experience.
The standard of care the advisor owes the clients are different under the two regimes. The broker has generally been under the "suitability standard" when advising on -- or, rather selling -- an investment product. This is a fairly nebulous concept, but traditionally the standard is met as long as the sold product did not involve egregious facts and/or failed to provide proper disclosure. A new standard was recently established for brokers under Regulation Best Interest (or "Reg BI" for short). Many commentators have argued that this regulation is mere window dressing and that the true standard did not change significantly. It does require more disclosure of conflicts by the advisor, but many commentators have suggested that these disclosures are never read and/or rarely understood by the consumer. Oddly, rarely do brokers actually use the term "broker" in their title because it does distinguish them from their non-broker counterparts.
An independent advisor, on the other hand, has a legal fiduciary obligation to work in the best interest of the clients. When acting as a fiduciary, the independent advisor cannot receive commissions on selling securities. When the independent advisor does not accept commissions on selling any product, they are often called "fee only" advisors.
It is important to note that hybrid advisors exist - those advisors that are dually registered, i.e., they can act as brokers in receiving commissions and selling product under a lower standard and be independent advisors acting as fiduciaries when giving advice. The novice may be confused as to why two standards are allowed for one advisor since it is often difficult to know when the hybrid advisor is acting as a fiduciary and when the hyrbrid advisor is not. That confusion is not unwarranted. Indeed, studies have indicated that consumers are confused, and they didn't know that their "fiduciary" advisor was, in fact, not acting as a fiduciary when certain products are sold. This is not to say that all hybrid advisors are out to get the consumer or that they are not competent, holistic advisors; rather, we are suggesting that is important to understand the potential motivations behind the advice. If you go to a car dealer, you know you are being sold. It doesn't mean that the statements are inaccurate. You just have to use your judgment when receiving recommendations. Of course, one should do this when receiving advice from any type of advisor.
Another term that I wanted to specifically address is the "investment advisor". As stated earlier, an investment advisor is a generic term, and really any advisor can give themselves such title. It doesn't indicate an area of specialty, whether or not the advisor is holistic, how one is paid, or how one is regulated. Contrast this with an Investment Advisor Representative ("IAR"). An IAR does have special meaning, and that is the fiduciary advisor that is regulated under '40 Act. While an IAR may have fiduciary obligations, such title does not mean that one focuses on merely investment management or that one does not address financial planning issues in holistic manner. Furthermore, it is really hard to tell the level of expertise of the particular IAR since the exam that is required to pass - the Series 65, like the Series 7 -- is not necessarily the most stringent exam and is not required in all situations. There are no continuing education requirements with such exam.
The broker can receive a commission in a variety of ways. It can receive trading fees on individual securities although this is less rare. They may receive the mark-up on bonds that are sold. Or, they may receive commissions from selling mutual funds such as an upfront sales charge, a sales charge during the time the consumer owns the product, or a sales charge when you sell the product. In some cases, the company that "manufactured" the product is being sold gives a kickback to the broker for selling the company's product. Yes, the broker may be influenced to sell certain products over others because of the level of commissions or kickbacks. Reg BI made a few adjustments to these practices in terms of attempting to encourage more transparency in how advisors are paid and to reduce certain sales practices; it did not eliminate these, however. The broker may also be licensed to sell insurance and annuities and can receive commissions on the sale of these products.
The IAR, on the other hand, cannot receive commissions when acting as an IAR. An IAR that is said to be fee-only can never receive commissions. These fee-only advisors can get paid a variety of ways. Traditionally and still the dominant way for fee-only advisors to get compensated is through charging a percentage of assets managed. The rate charged can vary from one firm to the other, and the value may also vary. In the industry, these fee-only advisors are commonly called "aum advisors". For a typical portfolio, for example, the fees may range from 1.0% to 1.5%. If you can find an advisor that charges less than 1%, you are doing relatively good. The aum advisor may also provide some level of financial planning for the fee; however, the level of planning varies, ranging from "planning light" which is done just because the advisor feels like they need to say the provide planning all the way to comprehensive, detailed, tax-focused planning. It is important to understand what you are receiving for what you are paying, obviously.
Other ways to charge fees outside of the traditional aum approach is flat fee or hourly. The flat fee is just that - a fee that is generally fixed and stated up front. The fee and services may be for a short period of time (e.g., 2-3 meetings) that covers more defined issues or may be for an annual open retainer that covers comprehensive issues up-front and as they arise. (This open retainer approach is sometimes called a "subscription" approach.") The open retainer approach is generally continual with the thought that the client is looking for a long-term relationship from the advisor and appreciates the value that is added from advice stemming from changes in the personal circumstances of the client or changes in the external environment (e.g., economy, tax laws). Some advisors - even fewer than the flat fee approach - charge hourly. Typically, the open retainer advisors and hourly advisors cover issues more holistically and are not merely focused on investment advice. Again, there are always exceptions as some hourly advisors focus merely on providing investment advice.
Like the other compensation models, the fees can range widely based on the issues addressed, the level of complexity, and the experience of the advisor. Some fee-only financial advisors may charge one or a combination of all of the above ways. While I will save discussing the pros and cons of each type of fee arrangement for another article, I would argue that there is not one right way in charging fees. Also, one method is not necessarily cheaper than the other. Moreover, some often think that the fee-only approach is always cheaper than the commission route. This is often not the case since the fee-only advisor typically provides much more analysis and advice; understandably, that advisor needs to get paid for that level of work and expertise.
Where to Find a Fee-Only Financial Advisor in Tampa or Orlando?
Pure fee-only advisors are harder to find because it is said that less than 2% of the financial advisor population is pure fee-only. While it may be difficult to find a true fee-only financial advisor on every corner, they can be found on a variety of fee-only financial advisor organization websites. While I will cover these organizations in more detail in a future article, here is a brief list of the organizations or networks where you can find fee-only financial advisors:
- National Association of Personal Financial Advisors (NAPFA) - NAPFA's Find an Advisor.
- The Alliance of Comprehensive Advisors ("ACP") - ACP's Find an ACP Advisor.
- The Garrett Planning Network - Garrett's Find an Advisor.
- XY Planning Network - XY Planning's Find an Advisor.
Despite these organizations being fee-only, the level of advice, the focus of the services (holistic planning v. siloed investment advice v. tax-focused holistic planning), the experience, and the general approach by the advisors can vary between and within these organizations.. The consumer does need to understand that hiring an advisor - yes, even a fee-only advisor - does require some expense on the consumer's part. It is up to the consumer to ultimately decide the value they will be receiving from the advisor and determine whether the fees are justified.
Where to Find A Range of Financial Advisors in Tampa or Orlando?
As indicated earlier, you may want to work with advisors other than fee-only advisors as a certain level of expertise can be found on either side of the aisle. The bulk of the advisors on these sites will be commissioned-based to some degree, but they will include both commissioned-based and fee-only. While a google search will turn up many choices and you can find many advisors with a range of skillsets, incentive structures, and sales quotas at your corner retail bank or wirehouse, there are a couple of online sources to find both brokers and fee-only advisors, including the following:
Differentiator #3: Credentials
Credentials are required in many disciplines to establish a minimal amount of expertise and may be established and enforced by a governing body (e.g., State Society of CPAs) or by an independent firm which is often a non-profit organization. While I will cover the wide range of credentials in another article, I did want to address one of the primary credentials used in the financial advisory space -- the Certified Financial Planner®, or CFP®.
To be a financial advisor (or whatever title), you do not need to be a CFP®. There are said to be over 300,000 financial advisors (and this does not include all of the talking heads on the t.v. yelling "buy-buy...no...sell...sell") in the U.S. but only approximately 80,000 are CFP®s. CFP®s have to pass a comprehensive exam that covers a range of financial planning issues in a broad manner. Most, but not all CFP®s, generally deliver holistic planning in some form. It's important to note that you should not necessarily rule out someone without a CFP®. I know many advisors that are not CFP®s that are perfectly capable of addressing a range of planning issues, but I would say those are becoming more rare. As noted above, CFP®s can be either commissioned-based, fee-only, or both.
Thus, when choosing an advisor, ignore titles but ask questions about how the advisor works with clients, what motivates their advice, what their level of experience and expertise may be, what are they passionate about, and what are their levels of training and credentials, if relevant.