When it comes to financial advice, there’s a lot of ambiguity surrounding titles. The list is a mile long and includes names like: financial consultant, fee-based advisor, account executive, associate, financial advisor, investment adviser, financial planner, wealth manager, and on and on. A humongous mistake made by investors is assuming that all of these titles mean the same thing. They all sound similar, but they most certainly are not.
Everything other than investment adviser and certified financial planner are titles that brokerage and insurance firms have created to confuse you. They made up these elaborate titles to make their sales force seem more sophisticated and trustworthy. The title most guilty of confusing investors is financial advisor. This was meant to sound exactly like investment adviser, but shockingly enough, it isn’t.
You see, financial advisors are technically registered representatives of brokerage or insurance firms. The same goes for associates, wealth managers, account executives, financial consultants, fee-based advisors etc. The titles are supposed to make you think that you’re dealing with a trusted adviser. However, registered reps are paid through commissions, sales loads, 12b-1 fees, kickbacks and revenue sharing arrangements. Why is this important? Their advice should not be expected to come without bias because of how they get paid.
A recent Huffington Post article offered two analogies that illustrate this conflict of interest well:
“Would you have as much faith in your guidance counselor’s recommendation to attend a college if she received a $5,000 kickback from that college for every student she convinced to matriculate? Would you be more likely to buy a car if, instead of dealing with Johnny the Car Salesman, you were having a conversation about your vehicular future with Jonathan, Automobile Adviser, CAA, MCS?”
When it’s presented in that manner, it seems a bit ridiculous, right? So why don’t we view financial advice in the same way? I’m not sure how anybody can be trusted to give unbiased advice when they’re compensated to sell you something. A lot of the blind trust investors place with their “advisors” is unfortunately misplaced because they don’t know any better. They let elegant sounding titles distract them from what really matters: how their adviser is compensated.
If you are truly in search of unbiased financial advice, you need to look for a fee-only investment adviser. Fee-only investment advisers are obligated to act as fiduciaries for their clients. This means they must put their clients’ interests ahead of their own. The fee-only structure (not to be confused with fee-based) ensures that an adviser is only being paid by their clients. There are no third parties paying a fee-only investment adviser to push their products on clients. The fee-only method of compensation removes the potential for compromised financial advice.
Unfortunately, in the world of financial advice, you cannot trust titles. Find out how an adviser is compensated before you begin working with them. If you’re looking for a conflict-free arrangement, do yourself a favor and find a good fee-only investment adviser. If you decide to work with another type of financial professional, just remember that their advice probably includes a conflict of interest. I’m not saying they’re bad people, most of them aren’t, but their advice is more like that of a car salesmen than a doctor or lawyer.