We live in a world where information is easily accessible and relatively inexpensive. In this day and age, we can all be curators of information, research analysts, or self-proclaimed experts on just about any topic. Personal finance and investment recommendations abound, and a simple Google search for "how should I invest my money" uncovers dozens of articles touting the very best way to do so. With all of this information at our disposal, how do we determine what financial advice makes most sense for our own individual needs? Which "author" do we trust with the right combination of stock and bond recommendations for our Roth IRA? And should we seek our professional guidance, or simply implement all this free investment advice ourselves?
These are all loaded questions, and there is no "real" right answer when it comes to information you find on the internet. There are a lot of very qualified professionals and academics who use blogging and other forms of paid authoring as an outlet to explore topics of interest, and even supplement their own income. My suggestion is to read as much as you possibly can. Follow authors on twitter and engage in conversations. Ask questions. This process will not only be educational, but it will help you sift through the vast universe of information in order to weed out salesy and biased publications.
The same process should be implemented when searching for a professional advisor. If you're in the market for an advisor, learn as much as you can about them, and weed out those who do not appear to have best interests in mind. Get to know the advisors capabilities, credentials, and affiliations. Read any work they have authored, ask insightful questions about their financial planning approach and investment philosophy, and become familiar with how they are compensated. An advisors fee speaks volumes about the advice you can expect to receive from them.
I discussed fees in an earlier post, but here is a more complete breakdown of how advisors get compensated:
Commission only: These advisors receive commissions on the sale of financial products (such as mutual fund front-end loads, back-end loads, 12(b)1 fees, and trading charges).
Commission and fees: This is called fee-based, and is the most popular form of compensation for advisors. These advisors receive a fee for developing a financial plan and then receive commissions (see above) after selling you insurance and investment products recommended in your financial plan.
Salary plus bonuses: These advisors are compensated with a salary plus an incentive that reflects any new business the advisor has brought to the business. These advisors may receive higher bonuses by recommending or selling certain products and services over other options.
Fee-only: These advisors provide advice and/or ongoing investment management and are not registered representatives of any financial services company. These advisors have no financial stake in the recommendations they provide to you and they are required to advise only products they believe are in their clients financial best interest.
So which compensation model do you think yields the most independent and unbiased investment advice? The clear answer is the one whereby the advisor isn't beholden to commissions, and one in which the fee-structure is clear and transparent. A fee-only advisor is incentivized by increasing the value of his or her client accounts. Most operate with a flat fee-structure that bills against a clients assets under management (AUM). By increasing the base (AUM), a fee-only advisor can generate a higher aggregate fee. This alignment of interest between client and advisor is the cornerstone of a sustainable financial advisory relationship. Be sure to keep it in mind when shopping for a financial advisor.
Jason M. Gilbert, CPA/PFS, CFF
Jason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.