different types and levels of advice
I have learned and observed much in my 23 years as a financial advisor, on both the brokerage
and investment advisory sides of the fence. There have been major industry changes: evolution
from trading to asset management to holistic planning, increased regulatory oversight, product
innovations, etc. One thing that has not changed is the key role of the advisor-client relationship.
Advice sits at the core of financial advising. As with tax accountancy and “lawyering,” clients
seek and pay for advice from people with expertise in their respective field. Not everyone needs
nor wants professional advice. For those who choose to go-it-alone, there are ample, online
financial, tax and legal resources. (Disclaimer: You get what you pay for.)
There are different types and levels of advice. The delivery of tax and legal advice is
straightforward, generally transactional. Ex. You pay a flat or hourly fee to have a tax return
prepared or a will drafted. (There are notable exceptions, such as % contingency fees or $
retainers, but those fall outside of this context.)
A financial advisor should serve the client
Transactional financial advice can be problematic. Brokerage and insurance commissions are
the most prevalent examples. A financial advisor should serve the client – not the other way
around. Commission-based transactional advice may or may not be in the best interest of the
client, but the advisor always benefits.
Further, when evaluating “suitable” product solutions, the transactional advisor must overcome
the inherent conflict-of-interest presented by products’ commission schedules. Ex. Commission
rates on annuities > mutual funds > stock and bond trades. Fee-based (hourly fee or % of
assets under management) financial advice can eliminate some conflicts of interest.
Fiduciary advisors are held to the highest standard of care. A fiduciary is legally required to act
in the best interests of the client and provide full and complete disclosure of fees and potential
conflicts of interest. Hiring a fiduciary does not guarantee successful outcomes, but you can
expect the most ethical mode of advice delivery.
It takes two
A financial advisor’s job is to solve problems. I tell prospective clients that working with a fee-
based financial advisor is like seeing your doctor: the greater the disclosure (“financial
undressing”), the higher the quality of advice. Not all “problems” require full disclosure –
engagements can be limited.
Financial problem-solving is best accomplished as an advisor-client collaboration. No expert (or
client) knows everything. “My way or the highway” advice (or client direction) is the height of
hubris and control. In my experience, we learn from one other. Advisors need client feedback
and input and, sometimes, a little grace. It takes two.