The word “independent” has a lot of positive connotations, but it can also be a deceptive sales pitch by financial advisors who sell retirement products to investors. Our surveys show most investors do not know the importance of independence and how it impacts them. There can be serious consequences if investors select a bad advisor who is masquerading as an independent professional.
It starts with the 800 pound gorilla in the room – you should not ignore gorillas. All financial advisors must make money from your retirement assets. That is how they pay the bills and accumulate assets for their own retirement. The critical issue is how they earn their money. Do they do what is best for you or what is best for them? Can you trust the advice they are giving you?
You can protect your financial interests if you know how to determine who is really independent and who is using the term as a sales tactic.
Conflicts of Interest
Notwithstanding the fact that advisors need to make money, an independent financial advisor does not have any major conflicts of interest that damage your financial interests. For example, they do not sell you inferior or proprietary products because they make more money.
Who Controls Advice?
True independence gets down to who really controls the advice that is given to you by your financial advisor. Is it the advisor or is it back office executives, who don’t know you, your needs, your concerns, or your goals? The independent financial advisor provides advice that is in your best interests and not the best interests of firms that are run by invisible executives.
Registered Investment Advisors (RIAs)
An independently owned RIA that is not controlled by a broker-dealer is your best solution. Avoid advisors from Wall Street firms. You have seen the headlines. They have countless conflicts of interest and are controlled by executives who don’t know you.
Select an RIA that is owned by financial professionals who live in your community and are not controlled by executives and shareholders. This type of registration gives financial professionals more control over the advisory sides of their business.
By law, RIAs and the advisors who work for them (Investment Advisor Representatives; IARs) are financial fiduciaries who are held to the highest ethical standards in the financial services industry. In this case, your interests have to come first. There is no other option for RIAs and IARs.
The RIA and IAR registrations also allow these firms and professionals to provide financial advice and ongoing service for fees. This is the appropriate way to pay for financial advice that will impact when you retire, how you live during retirement, and your financial security late in life.
Tip: Make advisors prove they are independent before you select them.