1,259. That's how many professionals in the Santa Barbara area alone (according to a quick LinkedIn search) call themselves a "financial advisor." But what does financial advisor really stand for?
In our opinion, most fall into two camps: the real advisors and the salespeople. If you don't know the industry speak, it can be tough to tell the difference between the two. Without good questions to ask, you could be looking for an advisor and end up with a salesperson. So how does a non-industry person avoid the feeling of "being sold"? How do they find a real financial advisor?
- Put themselves on the same side of the table as their clients
- Add value (not transactions) to the relationship
- Are transparent about compensation
We believe that real advisors will tell you they are a fiduciary. Real advisors share their clients' goals and motivations. Real advisors act in their clients' best interest, and their compensation is from fees paid by you (the client) without any additional compensation from outside sources. And real advisors can clearly state what they do and the clients they serve. (To learn more about what we do and the clients we serve, check out This Is What We Do)
Now most financial salespeople would agree. However, one significant difference remains, which is that salespeople get paid in the form of commissions. There are certain circumstances and instances where one-time payments or commissions are necessary, like buying a car or house. You are buying a product that fits a need; that is well and good. The problem lies when salespeople provide financial advice under the guise of "ongoing management and review of your accounts" and get paid based on transactions they complete. Every time you get together, the incentive exists for the salesperson to make a transaction or sell a product.
Put another way, if a salesperson working on commission invites you in for a review and then recommends a change, what are their motivations for doing so? It could be a very necessary recommendation. Or could it be for another reason? That's the inherent conflict of interest for the salesman making ongoing recommendations. That conflict doesn't go away unless they're willing to put themselves on the same side of the table with you and say "I''ll be paid the same amount no matter the investments I choose, no matter the number of transactions we complete."
So here's the ONE question you should always ask:
How do you get compensated?
Advisors should be able to clearly explain how they get paid (and you should be comfortable with their answer). Any answers that sound too good to be true warrant a deeper look. Some follow-up questions you could ask:
- How often do you get compensated?
- How many clients do you have?
- How often will I need to sign paperwork?
- How much access (liquidity) do I have to the funds in my account?
- Are you a fiduciary?
Any advisor worth their salt should be unfazed by any of these questions. They are worth asking so that you understand the kind of relationship you're entering into, whether it's with a salesperson or an advisor.
BONUS: Here are some common financial products that are sold by a salesperson:
- Mutual Funds (A-shares & C-shares)
- Unit Investment Trust (UITs)
- Annuities (Fixed, Fixed-Index, Variable, and Immediate)
- Non-traded Investments (REITs, BDCs, Equipment Leasing LLPs)
- Individual stocks or Exchange Traded Funds (ETFs) traded on commission
This is not an exhaustive list. The financial services industry is always creating new products to sell. If you own any these listed above, you should ask your salesperson for a refresher on how the fees work and how they were compensated.