One of the chief motivations for us in developing TodayForward has been the proliferation of salespeople masquerading as financial advisors. To the untrained eye, it may be difficult to snuff this out, but in the next several paragraphs, we'll give you three things to look for that will uncover whether you have a bona fide advisor or a simple salesperson. Just so we are 100% clear, we do not like salespeople in the world of personal finance; there is far too much at stake to have sales incentives get in the way of good advice.
Compensation
Ask an advisor, "How do you get paid?", and you may get a wide range of responses. Here's a breakdown of the most common answers:
- "I get paid based on the products you purchase from me." - this is a nice way of saying "I get paid through commissions." Salesperson.
- "I get paid a salary." - careful with this one. While it may be true that this person gets paid through a salary, it may also be tied to a bonus schedule based on the products they sell, so you need to ask another question, "Does your compensation change based on what you sell and if so, by how much?" A salaried advisor will fall into one of three categories: (1) salesperson, (2) entry level advisor, or (3) highly skilled advisor dealing exclusively with high net worth clients. Consider their answers to your questions and see where they fall in these categories.
- "I am compensated through a combination of fees and commissions depending on how you would like to proceed." - even though the word 'commissions' is here, it doesn't necessarily mean you're talking to a salesperson. Many individuals and families cannot afford to pay a fee out of pocket to an advisor or would prefer to have these fees offset or fully paid for through commissions. As a result, you would need to ask, "If we work together, will you tell me exactly how much I pay you?" If the answer is yes, you're talking to an advisor. If not, salesperson.
- "I operate exclusively on a fee basis." - this is the top of the heap as advisors that work only on a fee basis can be fully unbiased in their recommendations as they work directly for you. For this reason, fee based advisors are the best place to go. Of course, the only problem is they aren't cheap. Fees vary from region to region, but you can plan on paying $100 to $300 per hour for their services (this is why many will go with a fee and commission advisor).
Licensing and Credentials
A comprehensive financial planner will typically hold a number of different licenses that can include investment and insurance credentials as well as other designations such as CPA, JD, CFP, CFA, etc. To ferret out whether an individual is a salesperson or a genuine advisor, ask them, "What licenses and industry credentials do you hold?" At a minimum, they should have the following:
- FINRA Series 6 and 63, 65, or 66 - these are licenses to offer basic investments and are awarded by the Financial Industry Regulatory Authority (FINRA).
- State Life, Health, and Variable/Annuities - these are licenses to offer life, health, and variable insurance and annuities issued by the states.
If your advisor has at least the licenses above, they have a shot at being an advisor. If they only hold one, the odds are very good that they are simply a salesperson. In addition to these, other worthy credentials include:
- FINRA Series 7 - general securities license including more advanced types of investments
- FINRA Series 9/10 or 24 - supervisory license (these folks are on the hook for the people they supervise)
- State Property and Casualty - license to offer auto, home, renters, and personal liability insurance
- CPA - Certified Public Accountant
- JD - Juris Doctorate, an attorney
- PhD in Finance or Economics
- ChFC - Chartered Financial Consultant
- CFP - Certified Financial Planner
- CFA - Chartered Financial Analyst
The general rule is the more licenses and credentials listed above, the better - and the more expensive. All of the above are widely recognized and are awarded by well known institutions.
Clients or Customers
This is a great question to ask a financial advisor: "How many clients or customers do you service?" The larger the number, the more likely you are talking to a volume based salesperson. Most 'financial advisors' at retail banking locations or those selling for an insurance agency will have hundreds of customers (sometimes over 1,000) with most of them not speaking to the 'advisor' after the sale, whereas most advisors will service between 50 and 150 relationships annually, maintaining closer contact with their clients. The bottom line with this is to find out how much time they have available to work with you. Good advice takes time to create through questions, answers, analyses, etc., and if your advisor doesn't have time, you'll be sorely disappointed.
Wrapping Up
There are many other questions you could ask of someone to determine their ability to advise rather than to sell, but these three are the best place to start. With answers to these questions, you know how the person sitting across from you is compensated, what skill sets they bring to the table, and the service level that you can expect going forward. Top advisors will nearly always be fee or fee and commission based, have all of the minimum licenses as well as advanced licenses or other credentials, and have a higher number of hours available to dedicate to their clients. Sales people fall on the other end of the spectrum - paid based on sales, minimal licensing, no advanced credentials, and very limited time available to service existing clients. In the end, look for an advisor to help you set a course or fine tune what you're doing with your finances, and only speak with salespeople after you've determined your specific needs.
This last point is important. Salespeople are not inherently bad, evil, or ne'er-do-wells. They simply have a job that creates conflicts of interest that are detrimental to the financial planning process. In the worst cases we've seen, it was the result of a product being sold before the planning process could be completed. The top salespeople out there will be serious experts in the products that they offer, but that isn't enough. An advisor will be able to take a wider view and improve your chances of accomplishing your objectives by offering solutions that are often outside the range available to salespeople.
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