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Understanding financial adviser responsibilities for ordinary investors

You might be under the assumption that financial advisers are only for people with a lot of money. However, this is a misconception.



Financial advisers make money helping you manage yours. It doesn’t matter how much money you have; there will come a time when you will want the expert advice of someone who specializes in financial management to help you make wise decisions.

It’s akin to needing an auto mechanic at some point. It doesn’t matter if you drive an expensive sports car or a less costly family car. If something breaks or even for routine maintenance, rather than doing it yourself (unless you are a mechanic), you take your car to an auto mechanic.

The client-adviser relationship in finance and investment markets is often the subject of controversy.

The bias between adviser and investor interests is notoriously hard to discern. Attempts to legislate the relationships have been an ongoing struggle for state and federal governments.

This is something that both financial consultants and investors may have questions about. If you are an investor, understanding both sides of the playing field is advantageous. Below are eight factors investors should consider when looking for and developing new relationships with financial advisers.

1. What are your financial needs?

Before you can start looking for a qualified, recommended, and ethical financial adviser, you need to identify and prioritize your financial goals. Are you:

  • Planning for retirement?
  • Buying a new home?
  • Getting divorced?
  • Starting a family?
  • Expecting an inheritance?
  • Borrowing money to start a business?

Not all advisers will be best suited for your specific needs. For example, some people need help managing their money. They are not embarking on a new venture or life-altering event.

Money managers will help you create and stick to a budget, not spend more than you have and avoid credit card debt or help you get out of debt.

2. Is the adviser a financial fiduciary?

There are two different sets of standards for financial advisers. Investors should understand which one applies to any adviser they are considering hiring.

The suitability standard is for brokers who sell financial products and are compensated by a combination of commissions and fees. This standard allows salespeople to pitch certain products, but what they recommend should align with the needs, goals, and objectives of their clients.

The fiduciary standard governs Registered Investment Advisers (RIAs) under the Investment Advisers Act of 1940. It applies to advisers and firms who are paid fees for ongoing investment advice. The fiduciary rule requires advisers to put their clients’ interests ahead of their own when making recommendations. It is a higher standard that advisers need to meet.

In addition, this rule requires advisers to disclose any known conflicts of interest they face in presenting a recommendation.

3. How is the adviser compensated?

You should know how an adviser is being compensated, and the adviser in return should be transparent about the fees and how he gets paid.

There are typically three pricing models for financial advisers. Understanding which compensation category a specific adviser falls into will help you understand possible conflicts of interest and the adviser’s incentives. The pricing models are:

  • Based upon a fixed flat agreed-upon fee
  • Hourly rate based on how much time they spend with you

  • Assets under management fee which is based upon a percentage of assets managed

Even though advisers are held to high standards, when commissions are involved in suggested transactions, it could become more difficult for the adviser to put your interests first.

It is possible that they may unintentionally make decisions that are not independent of what they will earn. On a subconscious level, they could potentially be influenced by this payment structure.

4. What are their qualifications?

Financial advisers fall into several categories and many designations not commonly understood by ordinary investors.

Just because something sounds impressive, it doesn’t necessarily mean it correlates with the expertise you prefer. Some designations only require the adviser to take a few classes. This doesn’t necessarily mean they are any more qualified than an adviser who has not taken classes.

FINRA has a free tool called BrokerCheck where you can look up the experience and background of financial firms, brokers, and advisers.

5. Is the adviser independent?

You are better off hiring an independent financial adviser if you are looking for unbiased advice. Advisers who are tied to one company or one investment product, are less likely to offer you a comprehensive, diversified investment strategy.

Just as you wouldn’t go to Hyundai and ask about the new Toyota model and expect an impartial opinion, you can’t expect an adviser who is not independent to suggest options that are outside his company or firm-specific products.

6. How well does the adviser communicate and stay in touch?

When dealing with your finances, it is a very personal and critical activity. It is essential that you understand what your adviser is suggesting or how it will affect you in both the short-term and long-term.

Any adviser you select should be patient when discussing your options to make sure you have a clear understanding of the agreed-upon decisions. In addition, they should provide you with reports, communicate often and openly via emails and phone, and even arrange to meet you on a regular schedule — perhaps quarterly.

financial adviser
The adviser you choose should have a personality that makes you feel comfortable. (Photo by Pressmaster via Shutterstock)

7. Are you compatible?

If your adviser is intimidating or impatient with your questions, do not hire him. The adviser you choose should have a personality that makes you feel comfortable.

Your finances are as personal and important to you as your health. Just as we would like our doctors to have a good bedside manner, we want a financial adviser that we like and trust.

8. How do they protect your data?

Keeping your financial information secure is vital, especially in today’s times where so many people are getting hacked, and others are victims of fraud. It is the responsibility of your financial adviser or their firm to have the necessary safeguards in place for your protection.

Make sure they are using the most up-to-date technology to protect your information and finances. Don’t be afraid to ask them.

If they don’t know or their answer is less than satisfactory, keep looking for an adviser who can assure you are protected.

When you are deciding who to hire as a financial adviser, remember that you are in the driver’s seat. Make sure you do your research, ask the right questions, and have a clear understanding of the responses you are given.

In addition, advisers should ask you questions so that they understand your needs and expectations. If they don’t ask any questions, they are probably not going to be a good adviser that will customize a plan specifically for your needs.

(Featured image by Dragon Images via Shutterstock)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

David Trounce is a small business consultant living in Port Stephens Australia. He is the Founder of Mallee Blue Media and specializes in small business marketing and management. David also writes for, My Customer and the Huffington Post.