Wondering whether you should use an independent financial advisor? Independent financial advisors – who are compensated by fees not commissions – are the second most popular type of financial professionals among Millionaire investors.
Millionaires - individuals with investable assets of $1 million to $5 million - most commonly use a full-service broker, but 18 percent of these typically sophisticated investors engage an independent financial advisor.
What advantages does an independent financial advisor offer? Unlike an in-house advisor who is limited to the menu of products approved by his employer, independent financial advisors can help investors make informed and objective investment choices from a wide range of financial products, according to LPL Financial, a financial service firm that provides services to more than 12,500 independent financial advisors.
Some independent financial advisors register with the National Association of Personal Financial Advisors, or NAPFA, the professional organization that holds fee-only financial planners to a high ethical standard. The organization defines a fee-only planner as one who is “compensated solely by the client” not by sales commissions, which, according to NAPFA, create an inherent conflict of interest for even the most well-intentioned financial professionals.
“Unfortunately, the vast majority of financial advisors in the United States are sellers of financial products,” said NAPFA in a prepared statement. “Some or all of their income may be dependent upon their ability to steer their clients to a limited number of the thousands of financial products available today.”
Most Millionaires – 55 percent - prefer paying fees vs. commissions, and 61 percent say they are comfortable with the fees paid to financial professionals, according to Millionaire Corner research, which finds that Millionaires engage an advisor to help manage or completely manage more than half of their assets.
Some independent financial advisors charge a flat fee for a service rendered, such as devising a financial plan, while others charge an hourly professional fee and others, a percentage of assets under management.
An independent financial advisor may have earned a professional designation, such as Certified Financial Planner, or CFP. Some credentials denote more expertise than others, and it’s wise for prospective clients to thoroughly research a potential advisors background before entering a working relationship. The website Bankrate.com recommends asking key questions during a preliminary interview to determine an advisor’s experience and qualifications, services offered and approach to financial planning. Savvy investors will determine how an advisor is compensated and how fees are structured, and will ask whether the advisor has been disciplined for unlawful or unethical actions.
Trustworthiness is the top selection criteria for Millionaires choosing a new advisor, according to Millionaire Corner research. More than 93 percent of Millionaires are also heavily influenced by an advisor’s investment track record and whether the individual provides transparency. Fees and commissions are a key factor for 86 percent of Millionaires.
According to LPL, An independent financial advisor engages in holistic financial planning, taking into account a client’s long-term goals and needs at various life stages. He or she can help clients establish a financial plan that considers savings goals, such as buying a home, paying for college and setting aside enough money for retirement. An independent financial advisor can also help investors manage their cash flow and credit needs, and evaluate the tax consequences of their financial decisions. As appropriate, an independent financial advisor can discuss a range of investments, including stocks, bonds and alternative products.