What is a “Financial Advisor”?

Many people call themselves “financial advisors,” but there can be significant differ­ences among them. No education, experi­ence, or testing requirements are needed to call oneself a financial advisor. Whether you are getting advice from a financial planner, wealth manager, stockbroker, insurance broker, accountant, or other type of advisor, here are several questions that you should ask before deciding to do business:

Is the advisor an RIA?  An RIA (Registered Investment Advisor) has passed a rigorous exam and is required, by law, to adhere to certain requirements, including:

  • Acting in a fiduciary capacity.  An RIA must act in your best interests in all aspects of the financial relationship. Non-RIAs (including stockbrokers) are not held to this higher standard.
  • Disclosing all conflicts of interest. An RIA must tell you, up front, about any potential and actual conflicts of interest; non-RIAs are not required to do so. For example, a stock­broker who can win a free vacation for sell­ing a specified amount of a stock or mutual fund does not have to disclose that fact to you.

How is this advisor paid?  Does the advisor receive commissions, charge a fee, or both? Make sure that you ask enough questions to obtain a clear understanding of how the ad­visor is paid, before you become a client. Be wary if the advisor is evasive, gives confus­ing answers, or refuses to tell you.

Anybody who provides financial advice to you, and/or helps you invest your money, is getting paid by you in some way. If you have the impression that there is no charge for such “advice”, begin asking questions.

How much will I pay this advisor?  An advisor who is “fee-only” (does not sell pro­ducts nor earn commissions) should be able to clearly tell you – up front – how much the fee for his or her services will be. If the ad­visor is paid all or in part on a commission basis, you should understand how much the commission percentage is, what it is based on, and if it is up front or deferred. Also, are trailing com­missions built into the annual mutual fund expense ratio, and if so, how much are they?

Knowing the answers to all of these questions will help you to make a wise and informed decision that is in your best interests, not someone else’s.

(Note: Mentor Capital is a “fee-only” firm and an RIA.)