The financial advice industry is broken. It isn’t broken because of bad people. There are many incredibly kind and generous people in the industry. It’s broken because the system was built to sell financial products and/or to generate fees from investment management. The system was not designed to provide the service everyone needs, financial planning.
Sadly, even the term financial advisor doesn't mean much. It's not a well regulated term. You can call yourself an advisor right now with no training, no qualifications, and no experience. When you meet someone who says they are a financial advisor you have no idea what that actually means or how that person gets paid. This leads many people seeking financial advice to end up in front of commissioned salespeople that use the allure of financial advice to sell their high fee, high commissioned, highly conflicted products to you and call that sales process financial advice. These products come in many shapes and varieties – any kind of permanent life insurance like whole life insurance or universal indexed life insurance, or annuities, proprietary or loaded mutual funds, and many other confusing terms. This confusion is purposeful. The industry relies on overwhelm, confusion, and obfuscation to hide their fees, commissions, and conflicts.
This was a shocking revelation for Aptus several years ago. Naively, we thought there must be thousands of real financial planners who charged flat fees for unbiased advice. We realized there were, essentially, none. With a growing number of advice-only financial planners, the options are gradually improving, but the industry remains a complicated minefield of distorted incentives, corrupted motivations, and misaligned objectives.
When choosing a financial advisor, first educate yourself on the types of advisors and how they get paid.
There are three main types of financial advisors.
1) Commission-Based "Advisors" (Broker-Dealer Agents, ~43% of the industry)
- Paid commissions for selling financial products like annuities, whole life insurance policies, or mutual funds.
- Incentivized to sell high-fee, high-commission products—even if they aren’t the best choice for you.
- They don’t have to act in your best interest. They just have to sell you something that’s “suitable.”
- In general, under the SEC's Regulation Best Interest and recent proposed rules for state regulators, a broker-deal that is not also registered as an investment advisor should not use the title advisor.
2) Fee-Based Advisors (Dual-Registered as Both Broker-Dealer Agents and Investment Advisors, ~45% of the industry)
- They wear two hats. They can wear the hat of a fiduciary and provide advice in your “best interests,” then switch hats to sell you a “suitable” financial product.
- They claim to offer independent advice, maybe even a financial plan, but their advice inevitably includes them selling you high-commission products.
- Dual-registration is problematic because the [broker-dealer] wolves can wrap themselves in [investment advisor] sheep’s clothing.
While there are many wonderful people earnestly trying to provide good advice as broker-dealer registered reps or as dual-hatted advisors, we respectfully encourage you to steer far away from these first two types of financial advisors. Ask this question of any potential financial advisor, “Do you, acting in any capacity, sell products for which you receive a commission?” If the answer is yes, we think you should run, don’t walk, away. You can also search the SEC's Investment Adviser Public Disclosure website to see whether an individual is registered as a broker, an investment advisor, or both.
We would encourage you to seek out those registered only as investment advisors. These pure investment advisors are also known as fee-only advisors. Fee-only advisors do not sell financial products, so have far fewer conflicts of interest.
3) Fee-Only Advisors (Investment Advisors, ~12% of the industry)
There are three different variants of fee-only advisors.
- AUM Advisors. The most common fee arrangement for fee-only advisors is charging a percentage of assets under management (AUM). The “AUM fee” carries its own conflicts of interest, so, for instance, AUM advisors may be more inclined to recommend investing your money than paying down debt. AUM fees, which can be 1% or more of assets, can add up quickly for high earners/good savers. A 1% AUM fee on a $5 mil. portfolio is a whopping $50,000 per year. Since there is overwhelming evidence that it’s incredibly difficult, perhaps impossible, to sustainably beat the market on a risk-adjusted basis, AUM advisors are unlikely to improve investment returns. Therefore, the AUM fee should, de facto, pay for comprehensive financial planning, which the AUM advisor may or may not provide.
- Flat-fee Investment Managers. One less common arrangement is a flat fee for investment management and financial planning. This arrangement can eliminate most conflicts of the AUM fee arrangement. However, the flat fees are typically quite high.
- Advice-Only Financial Planners. One even rarer arrangement is a flat fee just for financial planning. People that work with advice-only planners manage their own investments in their own accounts, typically with detailed guidance from the advice-only planner.
So how do you pick among the fee-only options?
We think you need to decide how you want to approach your financial planning. There are three types of people when it comes to financial planning:
DIY’ers love managing their own money and just need resources to guide them. If you’re a hardcore DIY’er, use resources like The White Coat Investor to educate yourself.
Delegators prefer to have someone do it all for them and are willing to pay for that convenience. If you’re a Delegator, find an AUM advisor or flat-fee investment manager who charges reasonable fees and isn’t incentivized to make self-serving recommendations.
Collaborators want to work hand-in-hand with a trusted partner to develop, implement and update their plan. They can execute the plan mostly on their own, but see value in having an ongoing 2nd set of eyes from a professional. They desire a truly collaborative financial planning relationship. If you’re a Collaborator, hire an advice-only planner for ongoing financial planning and investment guidance.
We think most young professionals, especially those who are comfortable buying and holding a simple portfolio of exchange-traded funds in their own brokerage accounts, would be best served by an advice-only financial planner.
You don’t think you want to roll the dice with a product salesperson offering a financial plan that’s ultimately designed to sell whole life insurance. And you may want to be skeptical of an AUM advisor tacking on a generic “free” financial plan to an investment management strategy that purports to beat the market.
Instead, the best way to get high-quality financial planning is to pay for it. Advice-only financial planners aren’t selling products or charging a fee on your investments. You directly pay for financial planning. This eliminates most meaningful conflicts of interest and ensures you actually get financial planning, not just insurance or investment sales.
Advice-only financial planning helps you:
- Control your finances and feel empowered.
- Spend in ways that bring you happiness, provide peace of mind, or express your values.
- Save appropriately for near-, intermediate-, and long-term goals.
- Invest your money into tax-efficient accounts.
- Slay debt.
- Address risks and contingencies with emergency funds, “squirrel” savings and insurance.
- Consider your estate planning needs.
- Develop simple, effective investment portfolios.
- Monitor, adjust and rebalance your investments over time.
- Determine when you might be ready to retire.
- Think about your legacy and the “why” of money.
The financial advice industry wants to keep you confused. It thrives when clients don’t ask questions. But you can take control of your finances. Educate yourself, demand transparent fees, and refuse to let the industry take advantage of you. The more informed consumers become, the faster the industry will be forced to change. Choose financial advice that works for you—not for the advisor’s paycheck.