In the Financial Advisors series, we have covered a variety of topics related to financial advisors and the financial planning industry. I hope the series has given you a better understanding of the industry!
This post will summarize each post in the series.
Understanding the different types of firms in the financial advising industry will help us understand the industry and frame our further discussions. Some types of firms include:
Broker/Dealer. Broker/dealer firms execute securities transactions and sell securities to customers. They charge commissions.
Registered Investment Advisor (RIA). RIAs give investment and financial advice to clients on an ongoing basis. They cannot charge commissions for transactions, rather they charge fees for advice.
Insurance Agency. Insurance agencies sell different insurance products.
An important distinction that can be made when looking at the types of fees financial advisors charge is the difference between a commission vs. an advisory/planning fee:
Commission. If an advisor is paid via commission, they are being compensated for selling some sort of financial product. Commissions are transactional.
Advisory/Planning Fee. Advisory fees are fees for ongoing advice – they are not earned by initiating transactions. Advisory fees can take the form of a percentage of funds managed or a flat dollar amount. Advisors can also charge separate financial planning fees (for example, a monthly fee or one-time project fee) for financial planning.
Designations are titles that show a professional has gone through a particular certification process. Advisors get designations to learn, for marketing purposes, and because some designations can substitute for required licenses.
The CERTIFIED FINANCIAL PLANNER™ (CFP®) designation is one of the most popular designations and is the standard in the industry for financial planning. The certification process includes several different parts: education, exam, experience, ethics.
A fiduciary is required to act in their clients’ best interests, not their own. It may seem surprising that all financial advisors aren’t required to act as fiduciaries. Which when you think about it is kind of crazy – you could be hiring someone to help you make important financial decisions that is not required to look out for your best interests first.
Financial advisors typically serve clients in a couple different ways:
Financial Planning. Financial planning involves understanding your financial/life goals and developing strategies to achieve them.
Investment Management. By “investment management” I am referring to ongoing management. An investor will typically open up accounts at a brokerage firm, and the investment advisor is given authority to make trades within the accounts.
It is most common for financial advisors to have a minimum account/relationship size for client relationships. For example, a firm may have an investment minimum of $500,000 or $1,000,000.
This is not necessarily a bad thing, but I think the problem occurs in that a meaningful number of the competent financial advisors have high asset minimums, so there are not many good options for people who are just starting out or do not otherwise have significant assets.
If you have any comments, questions, or ideas for future posts, please let me know
I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.
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