4 Different Types of Financial Advisors

4 Different Types of Financial Advisors

1. Brokers/Insurance Agents

Brokers and insurance agents have the same motivations as car salesmen—quotas and commissions on products sold. They sell you financial products, such as annuities, variable life insurance, and mutual funds. And they typically don’t represent your interests. These types of financial advisors are salespeople trying to move product. Beware of these types of advisors.

2. Fee-Based Financial Advisors

Fee-based advisors have a hybrid business model. These types of advisors not only earn compensation from the fees that are paid by their clients on portfolios they manage, but they also receive payment through the discounts or commissions from the products they’re licensed to sell, including mutual funds with higher fees and up-front sales loads. With this compensation model, many potential conflicts of interest exist as the amount of advisors’ income is affected by the financial products that their clients buy from them. Unfortunately, this business model can be very confusing to clients who may never really know if what they’ve been sold is the best option for their goals or for the advisor’s goals. At a very minimum, fee-based advisors should disclose clearly—and preferably in writing—when the product or strategy they are recommending pays them a commission.

3. Fee-Only Financial Planners/Advisors

Fee-only financial planners and advisors are registered advisors with the fiduciary responsibility to act in the best interest of their clients. You rarely find them at large banks or brokerage houses. They are more often found at independent investment or financial planning boutiques. They don’t sell or accept compensation for financial products, which means that they have fewer conflicts of interest and, as a result, offer higher quality client service. Instead of directly selling financial products to their clients, they work with trusted professionals to get the products their clients seek or need, without any fee splitting.

Fee-only advisors typically charge a percentage of investments that they manage or charge hourly or by retainer for their time. There are no lockup periods, surrender charges, or financial hooks either; clients are free to leave whenever they want to.

4. Registered Investment Advisors

RIAs are professional and independent advisors typically found at boutiques and firms independent of large banks, brokerage houses, insurance companies and other large financial institutions. Like many financial advisors, they offer their clients personalized financial and planning advice, but often for more complex financial needs. As independent advisors, they are not tied to any specific investment products or particular family of funds and are, in fact, legally bound to serve only the interests of the client and are held to the highest standard of care in their role as fiduciaries. These advisors are registered with state securities agencies and the Securities and Exchange Commission and are regulated by both. They are fee-only advisors.

An Important Note about Advisors Who Are Held to the Fiduciary Standard

A financial advisor that holds fiduciary standard is an advisor you can trust. This type of advisor is typically a fee-only advisor. He is in a position of special confidence when working with clients because he is required to act with undivided loyalty. Conflicts of interest and compensation methods are fully disclosed.

The Bottom Line? Choose Wisely

Choosing a financial advisor is a big decision. If you choose an insurance agent, broker, or fee-based advisor, your financial goals might not be their top priority because of the potential for conflicts of interest.

Rather, you should choose a fee-only advisor or registered investment advisor who is held to the fiduciary standard. This will ensure that your needs come first and that you receive the highest quality of service.


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