#039: Not All Advisors Are Created Equal

Last Thursday, as I was out at Happy Hour with my family, I ended up running into an old friend who I haven’t seen in many years. After doing the normal catch up, we started getting into some career talk and he ended up telling me how well things have been going and that he has begun talking to a few potential financial advisors.

Naturally, I began talking to him about some key things to consider, and asked what each of the individuals who he was talking to was telling him. He was surprised to hear me correctly guessing what some of these individuals were telling him.

My suspicions were that he wasn’t talking with a true “financial advisor” but more so product salesmen. This led into a deeper 15 minute conversation as to how many things in this industry work, and how you can ensure the person you eventually decide to work with has your best interests at heart. The summary of the conversation is this:

Not All Financial Advisors are Created Equal

I actually had a similar situation happen a few weeks ago with a different friend (Unfortunately this is a testament to how frequent this stuff happens), I ended up writing up a little twitter story about it if you’re interested. Ton of awesome other advisors had some great feedback on this post as well.

So let's dive into a few basics about the industry, and how you can ensure the person you choose to work with is right for you with a few basic questions.

There are generally 3 Main Types of Financial Advisors, we’ll go through what you need to know, how they get paid, and how they generally operate.

1. Insurance Salesmen

Primary Focus:
Insurance salesmen primarily focus on selling insurance products such as life insurance, health insurance, annuities, and other related products.

Key Characteristics:

• Product-Centric: Their primary role is to sell insurance policies, often focusing on specific types of insurance products that may or may not fit your overall financial plan.
• Commission-Based: These individuals often work on a commission basis, earning money based on the products they sell. This can create potential conflicts of interest, as the advice they provide may be influenced by the commissions they receive.
• Limited Scope: Insurance salesmen typically do not provide comprehensive financial planning services. Their advice is usually limited to the insurance products they sell, without a broader focus on your overall financial picture.

Here’s the main issue with these types of advisors. Many people need to get started in this industry as you try to build your book of business to the point where you can leave and start your own firm. Many of them want to do holistic planning, but they have a manager down their back trying to figure out how they can suggest life insurance in every financial situation regardless of suitability. 

Now as you well know if you’ve worked with us or listened to our podcast, life insurance is a fantastic tool. It provides protection & can be a key player in a successful financial plan. However, oftentimes people can oversell it, and other times presented as an “investment” when it's not. It’s insurance. 

Lastly, just because someone sells insurance doesn’t mean they fit into this category. There are tons of fantastic advisors who sell insurance as part of their services. You just want to ensure that is not the ONLY thing they are working with you on, that’s where the red flag comes in.

2. Investment/Asset Managers

Primary Focus:
Investment managers will generally just manage investment portfolios. Their focus is on growing and protecting your investments, typically through stocks, bonds, mutual funds, and other investment vehicles.

Key Characteristics:

• Asset Management: Investment managers' primary goal is managing portfolios to achieve specific financial goals, such as retirement or wealth accumulation.
• Fee-Based or Commission-Based: Compensation can be structured as a percentage of assets under management (AUM) or through commissions on the investments they sell. Understanding their fee structure is crucial to ensuring their incentives align with your interests.
• Narrow Focus: While they are experts in investment strategies, investment managers may not offer comprehensive financial planning services. Their advice is often focused on your investment portfolio rather than your entire financial situation.

There are tons of advisors out there who fit into this category. Their job primarily focuses around ensuring that individuals don’t “shoot themselves in the foot” by making emotional financial mistakes that could derail their entire financial picture. Often their goal is to help make sure your investments align with your goals, and that you are going to be able to retire on the nestegg you are building.

While this is an extremely important role in the financial planning process, unfortunately it leaves out some key components. Our investments could perform amazing year after year after year for decades, however - if we don’t have our cash flow in line, or any other part of our financial plan figured out, it could mean nothing if you’re never in a position to be financially independent.

3. Full-Scope Financial Planners

Primary Focus:
Full-scope financial planners take a comprehensive approach to your finances. They look at your entire financial picture, including investments, insurance, taxes, estate planning, retirement, and more.

Key Characteristics:

• Holistic Planning: These professionals consider every aspect of your financial life. They help you create a detailed financial plan that aligns with your goals, whether it’s buying a home, saving for retirement, or managing your estate.
• Fiduciary Responsibility: Many full-scope financial planners operate as fiduciaries, meaning they are legally required to act in your best interest. This ensures that the advice they give is truly tailored to your needs, not influenced by commissions.
• Fee-Based: Full-scope planners typically charge a flat fee, an hourly rate, or a percentage of your assets under management. This fee structure is often more transparent and helps align the planner’s incentives with your financial goals.
• Long-Term Relationship: These planners often work with clients over the long term, helping to adjust the financial plan as your life circumstances change.

Obviously, this is the direction we want to see all financial advisors move towards. This is how we operate at Opulus, and believe it is absolutely the best & most efficient route for individuals to achieve their financial goals. Working with someone who understands your entire financial picture, how everything works together, and has your best interest in mind, is the best way to operate in my opinion. 

People nowadays want maximum transparency, communication, and a feeling of financial security. This relationship is your best bet for all of those.

Key Questions for Advisors:

Lastly, I want to leave you with a few key questions to ask any individual who you may be considering as your financial advisor. Naturally, we would love to work with everyone. But obviously we understand that not everyone is a good fit for us, nor are we a good fit for everyone! Also, a lot of people just don’t like working with someone they know either - which is totally fine as well. 

Regardless, you should be equipped with the information you need to make the right decision for your family, here’s a few good ones:

1. Are You a Fiduciary?

• Why Ask This: A fiduciary is legally obligated to act in your best interest, which reduces potential conflicts of interest. Asking this question ensures that the advisor prioritizes your financial well-being over their own compensation.

2. How Are You Compensated?

• Why Ask This: Understanding how the advisor is paid (e.g., fee-only, commission-based, or a combination) helps you assess whether their advice might be influenced by financial incentives. It’s important to know if they benefit financially from the products they recommend.

3. What Services Do You Offer?

• Why Ask This: Different advisors offer different services. Some may focus on investment management, while others provide comprehensive financial planning, including tax strategies, estate planning, and retirement planning. This question ensures the advisor’s services align with your needs.

4. What Are Your Qualifications and Experience?

• Why Ask This: This question helps you evaluate the advisor’s expertise. Look for relevant credentials, such as CFP® (Certified Financial Planner), and ask about their experience with clients who have similar financial goals or situations as yours

5. What Type of Individuals Do You Typically Work With?

• Why Ask This: You want to ensure that this advisor works with people just like you, so that you feel comfortable walking into a relationship that you know they have handled many times over. Often certain advisors can have “specialties” or “niches” and don’t typically work with everyone.

Conclusion

Overall, there are a ton of awesome advisors out there doing great work for families. There is no reason that you shouldn’t be working with someone who has your family's best interest in mind & helping you accomplish all of the things on your financial checklist. 

Be sure to ask these questions to whoever you are going to potentially work with, and as always - if you need a second opinion or just want to chat, feel free to reach out. We are always more than happy to help give you some things & things to consider before making big decisions for your family.

Have a great week everyone! Cheers