A dear friend of mine gave her daughter a wonderful birthday present this year – an hour of consultation with a financial adviser! You are never too young to start planning your long-term investment strategy. If you are looking to hire a financial advisor, you need to be aware that there are basically two types to choose from. The important consideration is to understand that each of them are held to different legal standards. Here are the basics:
Registered Investment Advisers. These advisers are legally bound to serve as fiduciaries, which means they must put their client’s needs first. In order to minimize conflict of interests, they typically receive payment from their clients. You should expect a fee based on up to 1% of your annual account balance. Bear in mind that they will typically avoid recommending products that they receive a commission or sales incentive on. Registered investment advisers must register with the Securities and Exchange Commission if they manage over $110 million dollars.
Brokers. Brokers will recommend products that they receive a sales incentive on, and in theory, do so as long as the products suit your needs. If you don’t trade frequently, a commission-based investment can be cheaper in the long run. There is a new Labor Department rule that requires brokers to act like fiduciaries when they advise on IRA’s, but not on taxable accounts. And many brokerage firms are now offering fee-based accounts which come with fiduciary care.
Who to Hire? If you are just getting started and have fairly simple needs, consider starting with hourly financial planners to set up a basic strategy. There are also automated services which charge less than services where you interact with a human. Vanguard, Schwab, etc. offer both options. Make sure to interview multiple candidates and look for advisers who are certified and have extensive education in financial planning.
Final Word. Some registered investment advisers work at brokerage firms and act as a fiduciary for financial planning, but can also act as a broker and earn commissions if they recommend particular investments for you to look at. Make sure you are asking the right questions and understand the difference between financial planning and taxable investments.