Selecting a financial advisor is an important task, because it can greatly impact your financial future. It is important you understand the differences between the 3 main types of financial advisors, because they can limit the advisors abilities to make product recommendations, which can compromise your options and cost you money. How financial planners are compensated can also create a significant conflict of interest for the advisor to act in your best interest.

 

The three main groups of financial advisors are Independent advisors, Tied advisors, & Multi-tied. These three groups vary in their associations with certain companies and how they are compensated for their investment advice, creating a financial plan for you, and recommending certain products.

 

Independent Registered Advisors

 

IRA’s or sometimes IAR’s (Investment Advisor Representatives) are as the name depicts, independent. Having this independence from a company allows them the flexibility to recommend the best investment products, create a financial plan that is in your best interest, and provide you with unbiased investment advice. Many IRA’s actually own their firm and are more personally liable for their investment advice.  If the advisor is an acknowledged fiduciary this puts you in the best position as they are obligated to act in your best interest.

 

How Independent Registered Advisors are compensated

 

IRA’s are for the most part are paid a fee for their service. This puts you in the position of knowing they are not recommending one product or another because they are highly compensated on that product as they receive no commissions. Being compensated in this way allows them to avoid the potential conflict of interest. Generally speaking most fee based advisors will have a required minimum amount of assets you must have in order to do business with them. This can be as low as 100,000 or as high as 250,000, and some don’t have any minimum requirements.

 

Tied Advisors

 

A tied advisor is an advisor who is “tied” to one company. They are only able to offer you financial products which their company offers or is on their approved list. This greatly limits your potential investment choices and puts the advisor in a position where they need to convince you that these products are better than sliced bread. Often there is pressure put on management that spills over to the financial advisor to sell products which are more profitable to the company.

 

How Tied Advisors are compensated

 

How Tied Advisors are compensated potentially creates a conflict of interest with keeping your best interest at heart. Most tied advisors are independent contractors or employees of the company and are paid on a straight commission basis. In the financial planning industry there are products which are highly compensated products sometimes making 10 times more then another product, which may be a better choice for you. This puts the financial planner in a place where they have to take substantially less money to do the right thing for you. Although, there are a lot of financial advisors out there that do make the correct choice every day, you can see how this could end up not being in your best interest.

 

Some advisors may charge a fee in addition to receiving a commission or offer a fee only option, this can be better than them getting paid on straight commission, but they are still responsible to the one company they represent and have a limited selection of products from which to recommend.

 

Multi-tied Advisors

 

Multi-tied advisors may work with and be able to recommend products from 2 or more companies. This is better than only having 1 set of options to choose from, but still may limit your options.

 

How Multi-tied Advisors are compensated

 

Multi-tied advisors are compensated much in the same way as tied advisors are. They generally get paid a commission on the product they sell thereby creating a potential conflict of interest.

 

 

Retirement planning is important to you and your families’ future and so it should not be taken lightly. It is imperative you understand what may potentially influence and limit your financial advisors recommendations when creating a financial plan for you. The best financial planner will really get to know you and your goals so that they can make recommendations that will help you achieve your dreams, not theirs. Find a financial planner in your local area who is independent and you can establish a long term relationship with. Before you select a financial advisor interview four different advisors and score them, then choose the best one.