Hiring a financial professional can go a long way in helping you to manage your investments and reach your financial goals. But with so many different types of professionals to choose from, it can naturally feel confusing trying to figure out what each does.
An independent financial advisor can offer all of the same services as any other financial advisor, but they aren’t tied to a particular company or product. In this article, we’ll explain what an independent financial advisor is and how to know if you should hire one.
What Does an Independent Financial Advisor Do?
An independent financial advisor is a financial professional who isn’t associated with a particular financial institution or its products.
Many financial advisors are employed by a particular financial institution. These professionals are often very knowledgeable and can help you with many different areas of your finances. However, it’s important to be mindful of the message behind their advice.
For instance, some brokers are paid to recommend specific products and likely earn a commission when you do. And if the professional isn’t a fiduciary, then they are only required to recommend products that are suitable for you, not necessarily those that are the best for your situation.
So what exactly do independent advisors do? For the most part, they do the same as any other financial advisor. Depending on the professional you hire, they may specialize in helping you only with your investments. However, many advisors offer comprehensive financial planning services to help you with investment management, estate planning, insurance planning, retirement planning, tax planning, and more.
One of the key differences between a financial advisor who is independent and one who isn’t is where their loyalty lies. A financial advisor is paid by the firm they work for, often when they recommend specific products. An independent financial advisor, whether they work for an advisory firm or on their own, is often paid by the client themselves.
If someone is a fee-only advisor — which many independent financial advisors are — then they aren’t paid a commission on the products they recommend, and instead only make money from the fees they charge clients. Sure, it may cost you more to work with this type of advisor than one who earns commission. But you know their advice is unbiased.
Pros and Cons of Hiring an Independent Financial Advisor
As with most financial decisions, there are both pros and cons of working with an independent financial advisor. We’ll break those down in more detail below.
Pros:
Mostly unbiased financial advice
More comprehensive financial services
Transparent pricing in most cases
More options for financial products
Cons:
Higher out-of-pocket cost
Not always entirely unbiased
Pros
Unbiased financial advice: Perhaps the greatest benefit of working with an independent advisor is they are there to serve your best interests rather than a financial institution’s. As a result, their recommendations and advice are more likely to be unbiased.
More comprehensive financial services: Many financial “advisors” are really just paid to sell a particular product, such as life insurance. As a result, they can’t help you with your entire financial picture. Independent advisors, on the other hand, can usually offer more comprehensive financial services.
Transparent pricing in most cases: Many independent advisors use a fee-only compensation model, which is transparent and disclosed in the documents you receive when you start working together.
More options for financial products: Independent advisors aren’t limited to selling a particular company’s financial products. As a result, you have far more choices available to you to ensure you always get the product that’s best for you.
Cons
Higher out-of-pocket cost: When you work with a fee-only advisor instead of one who earns commission, you’re likely to pay a higher amount. After all, the clients are the ones paying their salary rather than the financial institution whose products they recommend.
Not always entirely unbiased: Independent financial advisors often have a fee-only compensation model, but that’s not always the case. It could be misleading if you hire one assuming their recommendations are always unbiased when they aren’t. Be sure to work with a fiduciary, meaning the advisor is legally obligated to give you the best possible advice.
How Do I Know if an IFA is Right For Me?
Working with an independent financial advisor comes with plenty of advantages. Because they aren’t tied to a financial institution, their loyalty is more likely to lie with their clients, allowing them to provide unbiased and comprehensive financial planning services.
When it comes to choosing the right financial advisor, it’s more of a question of choosing the right advisor for you. Luckily, there are several ways you can do that.
The first question to ask prospective advisors is whether they are fiduciaries. A fiduciary is someone with a legal and ethical responsibility to act in your best interests. Other advisors can recommend products that are only suitable for your situation, but a fiduciary must recommend the one that’s best for your situation. The easiest way to find out if an advisor is a fiduciary? Just ask!
Another way to decide if an advisor is for you is by asking them how they are paid. The most common compensation models for advisors are fee-only, fee-based, and commission-based. Fee-based means that an advisor primarily makes money from fees, but may also earn a commission on the products they recommend. Finally, commission-based means an advisor primarily earns money by recommending specific financial products.
Fee-Only
Fee-Based
Commission-Based
Makes money by recommending financial products
No
Yes
Yes
Makes money from client fees
Yes
Yes
No
Has potential conflicts of interest
No
Yes
Yes
At first glance, a commission-based advisor may sound like the best deal because you don’t have to pay a fee. Unfortunately, these advisors are motivated to recommend products based on the commission they earn rather than whether they’re the best fit for you. And if they recommend expensive products, as some do, then it could actually cost you more money in the long run.
Our Take
An independent financial advisor is a professional who isn’t tied to a particular financial institution, meaning they can recommend products based on their clients needs rather than those their employer requires. This perk can come at a cost, since your advisor is paid through your fees rather than commissions from their employer.
Finding a Financial Advisor
Not sure where to start with choosing an advisor? Personal Capital offers fee-only advisory services from fiduciary advisors who can help manage your investment portfolio and offer advice on every aspect of your financial picture.
Get Started with Personal Capital
Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.
