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Building a good relationship requires a solid foundation, and that foundation is almost always trust. But when it comes to your life savings, trust can feel like a very rickety bridge to cross.
It is completely understandable that many people hesitate to work with a financial professional. Handing over the keys to your financial future — and granting access to your hard-earned accounts — to someone you don’t know is scary.
Because of this fear, many people decide to just “stay put” and do nothing, which can be risky in its own way.
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One of the biggest sources of confusion is that the term “financial professional” is a broad umbrella. It covers many different roles, and unfortunately, not all of them are held to the same rules or standards.
To make the best decision for your family, you need to know who is sitting across the table from you. Are they a broker, an insurance agent or an investment adviser representative operating under a fiduciary standard when providing investment advisory services?
Here is a simple breakdown of the differences.
The broker: Focused on transactions
Brokers are often compensated through commissions. While they certainly want your account to grow, their primary responsibility is often to the brokerage firm they work for, not necessarily to you personally.
They might be excellent at picking a stock, but brokerage services are usually just one small piece of a much larger financial puzzle.
The insurance agent: Focused on products
Some professionals specialize strictly in insurance. While they might sometimes use the title “financial professional,” their training and credentials often center specifically on insurance products, such as life insurance or annuities.
Their recommendations are generally limited to the products they sell. While insurance is a vital part of a financial plan, an agent’s duty is different from that of a comprehensive planner.
If you talk only to a hammer, everything looks like a nail; if you talk only to a product salesperson, the solution to your problem will likely be a product, not a plan.
The investment adviser representative: Focused on you
This is where the distinction becomes important. A financial adviser who serves as an investment adviser representative and is required by law to act in a fiduciary capacity when providing advisory services — and who may carry the CERTIFIED FINANCIAL PLANNER® (CFP®) designation — has different obligations
As an investment adviser representative, I am required by law to operate under a fiduciary standard when providing investment advisory services.
In plain English, this means I am legally and ethically obligated to act in your best interest when I am delivering advice or managing assets in that capacity. I cannot recommend a product just because it pays me more or helps my firm. I must put your needs above my own.
If there is any potential conflict of interest, an investment adviser representative must disclose it to you upfront when acting in an advisory capacity. It is a relationship built on total transparency.
Why the CFP® designation matters
You might see many letters after a professional’s name, but CFP® is one of the most rigorous designations in the industry. It isn’t just a certificate you get for attending a weekend seminar.
To earn it, a professional must:
- Study broadly. Complete heavy coursework covering retirement planning, taxes, investments, estate planning, insurance and risk management.
- Pass the exam. Pass a comprehensive and notoriously difficult certification exam.
- Keep learning. Commit to ongoing continuing education to stay sharp on changing laws and strategies.
- Be ethical. Adhere to strict ethical standards enforced by the CFP Board.
Because of this training, a CFP® professional creates a comprehensive plan. They don’t just look at your investment account — they look at your taxes, your estate, your insurance and your life goals to make sure everything works together.
A practical example: The ‘retirement ready’ test
Imagine a couple, Bob and Linda, who are five years away from retirement. They have $500,000 saved and want to know if they can retire.
A broker might look at their portfolio and say, “Let’s move this money into these high-growth stocks to try to double it before you retire.”
An insurance agent might say, “You should put this money into an annuity to guarantee income.”
An investment adviser representative operating under a fiduciary standard when providing investment advisory services will ask, “What do you want your retirement to look like?” They might find that Bob and Linda don’t need to double their money — they just want to preserve what they have. The adviser would analyze their spending, Social Security timing and tax liabilities before recommending any specific product.
The value of a rational guide
Beyond the math, a fiduciary adviser acts as a rational guide. Money is emotional. Markets go up and down, and it is easy to make panicked decisions that could hurt your long-term wealth.
An investment adviser representative offers objective guidance to help reduce your stress. They educate you on the pros and cons of options so you aren’t guessing. They monitor your financial plan regularly, adjusting the sales as your life changes or regulations shift.
Successful financial relationships aren’t about hot stock tips — they are about trust, open communication and knowing that the person guiding you is legally required to act in your best interest within the scope of providing investment advisory services.
Dan Dunkin contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
