Can You Trust Your Financial Advisor? Or Anyone?

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Last updated on August 9, 2022 Comments: 10

After the financial crash and the Great Recession, people seemed to become even more wary than they were before of people in the financial industry. And that’s not without reason. But it’s important to understand whether you can trust financial advisors and stockbrokers, as some of these people may be helpful in your journey towards financial independence. So let’s tackle this fraught question here.

Financial Advisor vs. Stockbroker

Financial advisors and stockbrokers often get conflated. But, actually, they aren’t at all the same thing. Even though they can both advise you on investments and may even have some of the same educational background, financial advisors and stockbrokers aren’t the same thing.

The main difference is this: advisors give partial advice based on your best interests, and brokers sell products as a third party.

That’s a huge difference!

Financial advisors are, in fact, legally required to put their clients’ interests ahead of their own. Brokers also cannot legally advertise themselves as investment advisors. Because that’s not what they are, and they’re allowed to work in their own interests rather than yours.

Of course, this doesn’t mean that everything a broker says is terrible financial advice. Sometimes your interests happen to align with their own. But it does mean that you cannot take a broker’s advice on investing options as what’s necessarily in your best interest.

And on the other side of that equation, your financial advisor may not always be right. They have to tell you what they, in good conscience, think is best for you as the client. But that doesn’t mean they’re always right or always good at their jobs. Sometimes you can get terrible advice from a well-meaning financial advisor.

Another Major Difference

The same law that prevents brokers from saying they are financial advisors also defines what they are. They are legally people who are engaged in effecting trades of securities for individuals. This means that they have to actually do the trading.

So a broker will sell you a financial product and also do the trading on behalf of the customer, typically for a flat fee.

Some Similarities

With all this said, brokers and financial advisors do some things that are similar. For instance, advisors do sell their services for a fee. They have to make a living somehow. Sometimes this fee is a percentage of your assets annually, or sometimes it’s a per-service or hourly rate.

And on the other side, a good broker will work to get a full picture of your financial life. They are earning a commission, and it’s in their interest to do a good job for you so that you keep coming back to them for more deals. And some brokers can offer wrap accounts, which charge a flat fee–more like an advisor–for trading with the idea that it’ll reduce unnecessary trading by the broker just to collect more per-trade fees.

Financial Planner vs. Investment Advisor

We’ve been using the term financial advisor so far. But the fact is that there are different types of financial advisors, certified in different ways. And many advisors have different specialties.

For instance, a Certified Financial Planner is likely to offer investing advice. But it will more likely be in the context of a much broader conversation about your finances and your goals. These individuals can help with things like planning your future estate, helping you make a plan to pay off debt, or looking at your overall retirement savings picture.

An investment advisor can have several different certifications, which we’ll talk more about shortly. But they may focus more heavily on the investment piece of your portfolio and make specific recommendations for how to invest, rebalance your portfolio, and more. But they aren’t a broker, so they won’t do the actual trading for you, and they don’t get commission when you buy into certain trades.

Beware the Broker

All of this goes to say that you need to be wary when dealing with stockbrokers directly. These individuals are essentially salespeople. Even if they don’t exclusively offer you investment options from their own company, they aren’t necessarily giving you the best recommendations for your needs. And they could still be getting kickbacks for selling other companies’ products.

Your best bet rather than working with an expensive broker is likely to be using an investing tool like Ally Invest or Betterment. These companies are low-cost online brokerages where you can complete your own trades for a much lower fee. Often, these companies charge a flat annual fee based on your account balance. And you can tap into financial advice through these online brokerages for a relatively low fee.

With options like these, you can make your own trades if that interests you. Or you can decide to invest in an account that will keep your investments balanced on your behalf. This is more expensive than executing your own trades, most of the time, but it’s cheaper than working with a personal broker to manage your money.

Why You Might Work with a Financial Advisor

As mentioned above, financial advisors or planners have a much broader scope, most of the time, than just your investment accounts. They can look at your full financial picture to give you direction and help in making big decisions. A planner might help you figure out how to pay for your child’s college education while also saving for your own retirement. And they can generally ensure that you’re on track for saving for retirement, have the right insurance coverage, and more.

Working with a financial advisor can be a long-term thing. You might have one person that you meet with annually to review your finances and make adjustments for the future. You could also work with someone more often than this if you have a lot of assets or a complicated financial picture. But for many of us, we’ll just call in a financial advisor when we need some extra help sorting things out.

Regardless of your current financial situation or level of need, chances are there’s a financial advisor out there that can help you sort through it. The key is to find one that you can actually trust. Next, we’ll talk about how to do that.

How to Hire an Advisor You Can Trust

Typically people are most motivated to make decisions that benefit them the most. That makes sense to most of us. But what if people are compelled by law to make decisions based on the best interests of others. That creates a tricky situation sometimes. A financial advisor might think they’re working in your best interests, but it can be difficult to even the most astute of humans to sort through their true, underlying motivations.

That’s why you want to be particularly careful when you’re choosing a financial advisor to work with. Here are some things to look for in an advisor:

  • The Title: Look for a title that comes with a verifiable certification from somewhere like FINRA or Let’s Make a Plan. Don’t be afraid to actually verify that these credentials are up-to-date, as well.
  • Ask About Legal Requirements: You can and should ask an advisor outright if they are legally obligated to act in your own best interests. You can even double check that their contract includes this type of language.
  • Consider Conflicts of Interest: Even the most well-meaning advisors can have conflicts of interest at times. Ask your planner to disclose any potential conflicts of interest in writing and up front before you sign a contract.
  • Ask About Compensation: This is perhaps the most important question. Ask the advisor exactly how they are compensated for their work. If they simply make what you’re paying them to manage your portfolio or give advice, that’s a good sign. It means they are more likely to actually work in your interests because when you prosper, so do they. But if they get compensation from commissions on any insurance, investing, or other financial products, take a second look.

Finally, you can, of course, effectively hire yourself as your own financial planner. If you’re making very complicated decisions, this may not be the best route. But if you just want to make a general plan for getting out of debt, saving for retirement, or paying for college, you might be able to do that with the resources at your fingertips (like this blog).

Deciding whether or not to hire a financial advisor, then, becomes more of a cost-benefit analysis. Can they help you more efficiently understand your options and execute good financial decisions? Then they might be worth the cost. But if you have time on your hands to research financial options and make your own decisions, save the money and give that a try.

Article comments

10 comments
Anonymous says:

Financial advisors are providing a service for compensation. Very few people work for “funnsies.” Having worked in the industry for over 30 years I suggest the following to help you find an advisor.*

1. Experience matters. Consider their longevity.
2. Have they earned professional designations?
3. Get testimonials from them of people who have been clients for more than five years…that aren’t related. Business owners are better than less sophisticated clients, because they look at results.
4. Don’t be overly cynical. There are many advisors that DO work in for their CLIENT’S best interest. Look at what they do away from their practice, such as volunteer work. If they don’t serve others away from the office…

* A footnote. I am not an advisor, but was for over twenty years, and work with financial services companies.

Anonymous says:

You could compare this to a doctor’s visit. You are paying a Professional for their services. You pay the doctor for a check-up, to make a diagnosis, and they follow up with a cure by perscribing something.

With a financial advisor, you are paying them for their professional advice. You go to them with your financial problems, and they follow up with a solution. You pay them for their service. It’s a business. And yes, if they are smart they will act in the client’s best interest. We get paid by commission and referrals. We want repeat business, so therefore we want satisfied clients!

Anonymous says:

I’ve been told that financial advisors or whatever the title happens to be are not allowed (legally? ethically?) to tell you what they have invested in because it can be perceived as undo influence. Can anyone verify this? My broker absolutely swears that he cannot share his personal investments or the compliance people would be all over him.

Anonymous says:

There are a lot of pertinent questions and answers in both this post and the comments. I think Vernon and thc in particular make excellent points. As for the advisor’s own investments, I’m not convinced it’s relevant. Proper financial advice reflects the client’s specific circumstances, not a simple choice between “good investments” and “bad investments”. T-Bills, for example, can be good or bad, depending on the particulars of the investor’s situation.

Anonymous says:

Anyone can call him/herself a “financial advisor” but there are many differences among them. A Registered Investment Advisor (RIA) is actually bound by law to act in your best interests. A CFP certificant is bound by a code of ethics which pretty much say they must act in your best interests. But stockbrokers, insurance salespeople, etc. are only required to make “suitable recommendations”. There IS a difference.

Anonymous says:

Financial advisers are usually doing it to make a living (just like the rest of us). They will get paid and we should have no problem with them getting paid. The point (which is well made above) is to understand how the financial advsier is getting paid and how that may affect the advice given.

Another important qustion to ask a financial advsier is: “What do you invest your own money in?” If the answer does not include the investment that they are recommending for me I will want to know why not.

Anonymous says:

Does it really matter what the motivation is if they’re helping people? Someone is benefiting from the service he or she needs. The client isn’t forking money over to help the practitioner with their mortgage, but is seeking their help for equally selfish reasons. It all boils down to survival.

Anonymous says:

Flexo,

This is an important and valuable post. Most people do not realize that financial advisors are really nothing more than salesmen. Their compensation is not based on enrinching their clients, rather its determined from how much product they can sell. In this regard, stocks aren’t much different from cars.

Selling stocks can be a sleazy business. For example, these guys are often obliged to sell stocks they know will decline in value, they often participate in sales contests, will sell you stocks with hidden mark-ups or get kickbacks from mutual funds for pushing their fund.

Best,

James

Anonymous says:

While I do think that people choose careers for selfish reasons, I don’t think that’s necessarily a bad thing. You do want competent individuals in their careers, but we as consumers should exercise prudent judgement and try our best to align their [the professionals] interests with our own.

Anonymous says:

I think most people go to school for those type of jobs to become wealthy and enjoy the prestige that comes with the title. From my experience, very few are truly motivated by the desire to help people. However, if you ask them they will probably say, “It’s because I want to help people.” It’s the politically correct answer.

A financial planner is likely concerned most about #1 – themself. If you as their client benefit in a good way then kudos. But that’s just my opinion.