Two heads are better than one. The more the merrier. Unity is power. These sayings demonstrate the strength in numbers—but each on one condition: For teamwork to make the dream work, everyone must be pulling in the same direction.
Unfortunately, some investors may find their retirement goals have fallen short of the finish line because their advisors have been pulling in the wrong direction. They may be paid daily commissions and monthly bonuses and then rewarded with fancy vacations—all courtesy of embedded fees, which are difficult to decipher in the products sold. It is a direct conflict of interest and changing the paradigm can be key to protecting one’s financial future.
A significant shift has been taking shape in the world of financial advice. For the past few years, advisors have been leaving the big wire-house firms to pursue jobs as independent financial advisors. They’re not tied to a particular firm, family of funds or proprietary products. They earn no commissions but instead earn a living by providing impartial investment advice. More than 16,000 financial advisors were added to the registered investment advisor (RIA) channel from 2011 to 2016, including dually registered advisors, while the number of advisors shrank by 7.2 percent at wire houses and 18.8 percent at independent broker-dealers.1
“Fee-only” financial advisors, many of whom are set up as RIAs, are legally required to act as fiduciaries. By working with these advisors, a client should expect to receive unbiased advice and a greater breadth of investment opportunities, which can include private equity, hedge funds, cryptocurrency and a number of alternative investments. Having more options may sound complicated, but they may provide better outcomes or at least a means to further diversify and reduce risk. Most investors want an advisor who has the ability—and confidence—to make recommendations when appropriate, and because these advisors receive no commissions, they have no incentive to steer you in the wrong direction.
Fiduciaries can “shop the street” for better products and prices. For example, you may have rental properties with adjustable-rate mortgages that you want to protect, or hedge, against rising interest rates. Chances are, an advisor working on commission won’t have access to these products, and even if they do, it’s doubtful they’ll be at the best prices. An independent fee-only advisor, however, can quickly find the best products and prices. They also have access to multi-custodial platforms, which can provide an enhanced ability to aggregate account information to view and analyze all of your assets—essential for making good decisions. Major custodians spend a large and meaningful percentage of their profits annually upgrading their cybersecurity, technology and applications to protect and enhance the client experience.
As you approach retirement, your advisor needs to manage two asset pools. One is to provide income during retirement while the other is to manage taxes and transference of the estate. They’re different goals, different risk tolerances and different time horizons. That means they need different attention. But if your financial advisor can only see and manage the assets you’re holding at their company, you’re getting advice based on limited information. It can potentially be financially dangerous. For example, you may inadvertently buy an investment that counteracts another held with an-other firm. Independent advisors can take all assets and goals into consideration before executing a holistic, comprehensive strategy.
Finally, independent advisors can usually adopt new technology faster. With larger firms, there are usually more administrative hurdles, so it can take a long time before technology gets implemented. With today’s fintech revolution, there’s a tremendous amount of technology with thorough expense tracking and tax-reporting capabilities. It can allow for better decisions—provided your advisor uses it.
The wealth you have at retirement is a direct result of the choices you make today.
By working with a fee-only advisor, you can avoid the inherent conflicts of interest with commission-based sales. There are few guarantees in financial planning, but taking this step at least helps ensure that your team is pulling in the right direction.
1. The Cerulli Report: Distribution 2017, Exhibit 2.05.