The financial advice industry is complex, full of jargon and certifications. It is very easy for even the savviest people to be confused by all the different terms in the industry. Whether you have an advisor currently or you are on the hunt for one, here are some important things to look for.
How do They Get Paid?
There are many ways a financial advisor may get paid. Many will get paid directly by their clients, either as a percentage of assets under management, an hourly fee, a financial planning fee, or some combination of all three.
Some advisors are also paid by selling products to clients. This can be insurance coverage, specific mutual funds, or annuities. An advisor may be fee-only (only collecting the fees their clients pay directly to the firm), commission-only (only collecting the commissions for selling a specific product), or a combination of the two, which is commonly called fee-based. If you do not know how your advisor is paid, make sure to ask them.
Every type of fee arrangement comes with its own potential conflicts of interest and advisors must disclose to their clients when one of these arises. However, they may disclose it in a way that is still confusing and unclear.
A conflict of interest arises when an advisor’s own self-interest is in conflict with the best interests of the client. For example, an advisor who earns commissions may have a self-interest in selling you a certain type of life insurance because they will earn a commission from it. This type of life insurance may not actually be the best for you, the client, or you may not really need life insurance at all. The advisor has a responsibility to explain the conflict of interest to you in a way you understand and explain how they will address this conflict.
American Money Management, LLC is a fee-only financial advisory firm. We don’t earn commissions of any kind. We believe this aligns us best with our client’s own interests.
What Do Their Credentials Mean?
Many advisors have professional designations they list, such as CFA®, CFP®, CPA, or CDFA®. These designations may indicate that the advisor has a specialty in a particular area or has completed extra educational and training requirements in order to use the designations.
These designations are not required by the profession so many financial advisors do not hold any. If you contact an advisor that does hold a designation, ask them to explain how that helps them serve you better. Many of these designations also list all holders on their directory so you can quickly and easily verify an advisor’s credential status.
The AMM team is highly educated and experienced. We have CFP® professionals, a CPA, a CFA® Charterholder, and a CDFA® in the office to support your financial needs.
What Is Their Specialty?
Some advisors only focus on specific areas of financial planning, such as college funding planning or budgeting specialists. Most advisors are generalists, interested in helping clients from all walks of life. Finding out a given advisor that can best help you and your situation is the goal.
If you are preparing for a divorce, consider consulting a Certified Divorce Financial Analyst® or CDFA® for short. You may also wish to find an advisor who specializes in helping people in transition from one stage of life to another.
Clients who are entitled to a pension or stock grant arrangement may wish to consult with an advisor who has experience with pension analysis or the tricky tax rules surrounding stock grants. Someone who makes a substantial amount of donations to charities may wish to hire an advisor who specializes in charitable giving.
Whether you work with a specialist or not, the most important thing is that you trust your advisor and you understand why they make the recommendations they make. Without those two things, even the most specialized advice may not work for you.
Many advisors enjoy working with clients from all different situations. Just because an advisor doesn’t have a specialty listed, does not mean they do not have experience in that area. If your advisor does not have a specialty you think is important, ask them how they can serve you and your situation best.
We have helped clients in many different situations and we have a number of specialties. Ask us about your situation and how best we can help you.
Read Their ADV and Ask Questions
The Form ADV (which stands for Advisor or Advisory) is required by the SEC for all investment advisors in the U.S. who manage $25 million or more. If you are interviewing an advisor who does not manage investments, they may not file an ADV. You can still ask them for the information an ADV covers.
The ADV outlines some of the most important information for a client to know about their advisor. It contains information on what the firm does, how they get paid, their investment philosophy, and any disciplinary actions against any of the advisors. The document is usually lengthy but is incredibly important for a prospective client to review and understand.
You may also be able to look up the firm through the SEC’s website at www.adviserinfo.sec.gov. Be sure to read the details of any customer complaints or disciplinary actions and ask your advisor about them. These tools are available for your protection so make sure to use them.
Our Form ADV and Form CRS are available on our website or in the office at all times. There have been no disciplinary actions against any AMM advisors.
The Fiduciary Duty
The word “fiduciary” has been in the news recently as the U.S. Department of Labor attempts to regulate investment advice regarding employer retirement plans and individual retirement accounts (IRAs).
In the most general terms, a fiduciary has a responsibility to act in the best interest of the client or beneficiary. One example is an attorney who always has a fiduciary duty when acting on behalf of their client.
In the financial advisory world, some advisors are required to be fiduciaries and some are not. Financial advisors who are not fiduciaries are legally allowed to place their or their firm’s self-interest ahead of that of their clients. It is important to know whether your advisor holds the fiduciary duty at all times, only sometimes, or not at all.
The CERTIFIED FINANCIAL PLANNER™ designation includes the fiduciary duty. When you work with a CFP® professional, they are a fiduciary anytime they provide financial advice to a client. Any firm which is a Registered Investment Adviser (RIA) holds the fiduciary duty as well.
If you are not sure whether or not the advisor you are interviewing is a fiduciary, all you have to do is ask. There are two important questions: Are you a fiduciary? Do you hold the fiduciary duty all the time or only some of the time?
American Money Management is a Registered Investment Adviser (RIA) and therefore our advisors uphold the fiduciary duty for our clients at all times.
These questions should give you a good starting point to figure out if an advisor is the right fit for you. Deciding to trust an advisor with your hard-earned money is an important decision. Make sure you understand the ins and outs of their business dealings before becoming a client.