by Lauren Aimes
Myth: Working with a financial planner from a big, well-known firm is always best.
Truth: Small, independent financial planners offer huge benefits for an investor.
Let me explain.
Most financial planners who work for a large, big-name firm can’t provide independent advice. Their advice may be controlled by their company. It may be persuaded by the requirement to generate revenue and income from your assets. They are burdened with the task of pleasing their bosses, meeting their company’s shareholders’ expectations for growth or pleasing a large board of directors. And many of these firms reward their employees with large commissions and bonuses for selling certain products – products that may not be in the best interest of their clients but that make the financial planner money in their own pockets.
At most independent firms, this isn’t the case.
It’s extremely risky to assume that all financial advisors provide the same advice. Consider the overhead at these big firms.
Why do so many investors work with these big firms, then?
Many are under the assumption that:
- A bigger firm is better
- You’ll feel safer investing with a well-known firm
- Brand names are easier to find
- Firms that have been in business for a long time can’t rip-off their clients
The truth is, some of the biggest firms on Wall Street have paid more than $100 billion of fines for cheating clients! Why? In some circumstances, it’s not the planner who rips-off clients, but the executives who run the firms who take advantage of investors’ naivety.
When companies are found guilty of misconduct, many times, it’s the company assets that are used to pay their fines. Small firms, on the other hand, are not allowed to come in contact with your assets. They must use a third-party custodian, such as Schwab, Fidelity, Pershing or TD Ameritrade.
Independent Financial Planners
In many cases, an investor will overlook a small, independent firm simply because he or she couldn’t find the firm.
It’s true that smaller, independent financial planners don’t have the same marketing budgets as these large mega-firms, but an investor should be able to locate them fairly easily if they know where to look.
Paladin Registry is a valuable resource. Not only do we offer free educational services for investors to verify a financial planner’s credentials and claims, but an investor can also look for a fully vetted and rated financial planner by name, zip code or services they provide. This service is free. We make no money off these searches. We simply provide the tools to help investors make the right decision when hiring a financial planner. It’s one of the most important decisions you will make, as this person will affect when you can retire, how you can live in retirement and what you’re able to leave your loved ones after you’re gone, if anything. We have heard retirement horror story after retirement horror story, and we want this manipulation to stop.
Other good resources include:
- FINRA (for compliance data)
- SEC (for additional registration and compliance data)
- Google (to search for relevant information using keywords)
When you work with a small, independent financial planning firm, many times, you work directly with the firms’ principals and key employees.
How Can Small Firms Provide Sophisticated Advice?
Wall Street firms would like you to believe that they are your only source of sophisticated advice and services, but that is not true.
In fact, independent advisors may have even greater access to high-quality research because they are not limited to reports from in-house analysts.
However, you must find a high-quality independent firm and advisor. Make sure your independent financial planner is a Registered Investment Advisor (RIA) or Investment Advisor Representative (IAR). RIAs are firms. IARs are financial advisors who are registered with RIAs. RIAs and IARs are financial fiduciaries who are held to the highest ethical standards in the industry. They are required by law to put their clients’ financial interests ahead of their own. Stockbrokers are not fiduciaries and are held to lower ethical standards.
How Do These Smaller Firms Make Money?
Because most of these smaller firms don’t have shareholders to worry about, a board of directors to please or layers of executives, they are able to provide advice that is in the best interest of their clients.
There are two ways to compensate a financial planner for their advice and services: Fee and commission.
When your financial planner is paid a fee, you pay the advisor the same way you would a doctor or a layer – a certain amount for the service he or she provides.
When a financial planner is paid a commission, they receive a chunk of money from a third-party for selling a specific product.
Advisors who are paid with fees have fewer conflicts of interest compared to salespeople who are paid commissions.
Where Do These Independent Firms Come From?
Many small, independent financial planning firms are created by an individual who at one time worked for a major Wall Street firm that more than likely pressured them to sell products that made the most money for the firms. Many of the advisors in the Registry have told us that they left so they could do what was best for their clients with no pressure from branch managers to sell particular products.
When choosing a financial planner to work with, make sure you ask the right questions – and know what a good and bad answer to these questions is. Education is key to stopping the Wall Street manipulation and protecting yourself from financial devastation.
If you’re already working with a financial planner, make sure you have a good system in place to properly monitor his or her progress. If you need help terminating a financial planner relationship, read these tips.
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