How Do You Fit into Your Financial Adviser's Plan?

If you’re like most potential financial advisory clients, you’ve heard advisers explain how they fit into your financial life. Advisers play the part too, giving you as the client the best audition, demonstrating their success, their prowess in the industry and their ability to be as effective as possible in creating the returns you need.

As a longtime financial adviser, I’ve come to believe that clients need to spend more time considering not just how an adviser fits them, but how your finances, goals and situation fit into a specific adviser’s business model.

In fact, I think this could be one of the most important questions to consider. The answer is just assumed: The adviser is working for the client, and they want to keep the client forever. However, this may not always be the case.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

What Are Your Adviser’s Motivations?

Understanding the profit motive of your adviser can help you decode the rationalizations of the recommendations they are making. A careful review of the three most prevalent business models may lead you to question the underlying motives of your adviser:

1. A commission-based business model. In this business model an adviser is paid a majority, if not all, of their revenue from the initial sale of the financial product. In this relationship the adviser is front-end loading their compensation. In order for more revenue to drip in for an adviser in this business model they must continue to place new financial products in your portfolio.
2. In a fee-only business model, an adviser is not paid an upfront commission, rather they are paid periodically based off the amount of assets that are held with their firm. In this type of model, the responsibility is on the adviser to create a perpetual revenue stream. Since no upfront revenue is generated, an adviser needs to keep the client for a much longer period if they want to make the same revenue as a commission-based firm.
3. In a hybrid model, an adviser receives some benefits of both of the above-mentioned business models. In a hybrid model an adviser charges an advisory fee, but still could receive commissions on the sale of certain products. If a commission is generated, this type of adviser must disclose that conflict of interest to the clients they are dealing with. This combination of revenue models can allow an adviser to build a practice in a short period of time, but still be able to plan for long-term client retention and growth.

As a financial advisory client, you must view every recommendation through the lens of whether that suggestion furthers your investment goals or not. The nature of the financial services industry has been very transactional, partly due to the underlying conflicts of interest for an adviser and also a client base that switches advisers or investments periodically, often tempted by the glimmer of the next best thing.

ABCs of Adviser Business Models

A potentially better system for the client-financial adviser relationship is one in which the adviser and client win OR lose together. There is no adviser winning and client losing. This type of system is based on long-term relationships where an adviser allocates your assets based off the relative strength of certain asset classes, sectors, money managers, mutual funds — whatever is needed to build a money management experience that is suited for their client.

The best advisers love what they do. They are passionate about investing, advising and financial planning. What can often be overlooked is the passion to serve their clients. By identifying where you as the client fit into the business model of the adviser, you can take control of your financial future. By not front-loading all of your adviser’s revenue, an investor can create the necessity of service in their portfolio. A happy client is a long-term client.

As the market changes, investors need to be able to adjust to the conditions of that market. If you take a short-term view to selecting an adviser who is giving you a short-term solution, you are not going to get a long-term result. The markets and changes in the market are built off a long-term strategy, so it makes sense that your retirement plan — the largest component of your financial plan — should also follow this strategy.

It’s important to determine both the adviser’s business model and their personal approach to working with clients to gauge whether they are the right fit for your long-term needs. Here’s an overview of the basic financial adviser business models:

1. Investment management: Focus on generating revenue from asset management and does not provide financial planning services. If you feel like you have a solid financial plan in place, but you want some help with building a strong portfolio, this might be the right model for your needs.
2. Hybrid: Combines investment management with financial planning, but the financial planning services are on an as-needed, informal basis. A hybrid model might be what you’re looking for if you feel that occasionally you might need some guidance on financial planning — perhaps when considering starting a new business or making another major life transition — but otherwise your needs are focused on investment management.
3. Wealth management: Fastest growing type of financial advising in the past 10 years. Provides comprehensive services to meet the needs of a broad range of typically more wealthy clients. If you have a large portfolio and more complex investment needs, you may want to consider a wealth management service.
4. Financial planning firms: Focus on the financial planning process to help clients reach financial goals. Investment strategies are usually passive and low-cost, such as ETFs or funds. A financial planning firm can be a great fit for those who are just getting started with investing, who don’t have complex investment needs or for those who feel comfortable managing their own portfolio and just need some guidance on reaching financial goals.
5. Financial consulting firms: More of a DIY approach with low monthly fees relying on phone or internet interaction with clients. Adviser overhead is low, and their preference is usually for high cash flow with less of an emphasis on long-term business value. This type of model is well-suited to those who are comfortable managing their own portfolio and require little financial planning guidance.

Consider your needs and how they fit into these models. Do you just need someone to manage your investments? Do you have a significant amount of wealth with more complex investment needs? Are you looking for financial planning assistance? For example, someone to help you figure out your retirement goals and what you need to do to reach them. Or, perhaps you need help with planning for a major purchase such as a home. Maybe you’re comfortable handling your own investing and financial planning and don’t feel the need for much financial planning assistance.

All of these factors will impact the type of adviser who is the best fit for your financial needs.

How to Find the Right Adviser

The questions below can serve as a guide for what to ask a potential financial adviser.

1. What stage of your career are you in? Background: Understanding where your adviser is in their career can help you figure out how their career goals intersect with your needs.
2. What types of retirement planning are you experienced with? An adviser’s experience should dovetail with your needs. Background: Many advisers are great in terms of helping you save for retirement but have little expertise in helping you determine a spending plan for those savings during retirement.
3. Is your emphasis on cash flow, income or asset growth? Background: Advisers have different philosophies about investments and retirement planning, and those philosophies should align with your needs. If you prioritize income in retirement and your adviser wants to grow your assets, that’s a potential disconnect.
4. What are the criteria you use to make an investment recommendation? Background: Advisers should have a strong sense of who their clients are and what their goals are. An adviser who is a good fit shouldn’t try to push you beyond your risk tolerance level. If they do, that should be a red flag that perhaps they don’t have your best interests in mind.
5. How open are you to pursing strategies that might reduce your compensation? Background: If you want to make a change in your portfolio that has the potential to reduce the adviser’s income and they are not willing to agree to changes, or doesn’t recommend certain moves, because they won’t be incentivized, that should also be a red flag.
6. How do you get to know your clients better? Background: Advisers should work not only to maximize your portfolio, they should also be invested in you as a person. Many personal details have an important bearing on your financial situation. Your adviser should keep these in mind when making investment or financial planning recommendations.

Once you understand your adviser’s business model, career goals and advising style, you’ll have a better idea if your needs are in alignment and you will be able to make an informed decision.

Amy Buttell contributed to this article.

Licensed Insurance Professional. We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

Investing involves risk, including the loss of principal. No Investment strategy can guarantee a profit or protect against loss in a period of declining values. Any references to protection benefits or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.

18718 - 2019/4/1