Independence is often viewed as a good trait. People like independent thought and the autonomy of making independent decisions. It seems only natural then that you’d want financial advice from an independent financial advisor. Wouldn’t such a person be more unbiased and focused on your needs than an advisor who has to answer to a bigger firm?
You might think this would be the case, but the reality is not quite so black and white. Independent financial advisors have a lot to offer, but so, too, do advisors who work for larger financial institutions. To determine if you should work with an independent financial advisor, first consider the differences and then what is important to you in your relationship with your advisor.
What Is an Independent Financial Advisor?
“An independent financial advisor is an advisor that is not tied to the proprietary products of one firm and/or not tied to minimum production requirements of one specific investment or insurance company,” says Frances Gardner, a certified financial planner and managing partner at Gardner Wallace Financial Solutions, an independent financial services firm in Addison, Texas.
Independent advisors have more freedom with the products they offer and how they run their business. Meanwhile, advisors who work for a large financial institution may only be allowed to offer their firm’s products and may have restrictions on how they can conduct their business, says Connor Spiro, a certified financial planner and financial consultant at John Hancock.
Many independent financial advisory firms are owned by the people who sit at the desks inside.
“(Independent advisors) can be small, independent operations with a larger firm providing some level of back office support or just completely and 100% independent on their own,” Spiro says. “If an independent financial advisor is licensed as a registered investment advisor, they then fall under the fiduciary standard, which mandates that they must always put the client’s best interests ahead of his or her own.”
Are Independent Financial Advisors Unbiased?
It seems an independent advisor should be more unbiased than an advisor working for a large financial firm. If you aren’t tied to another’s opinions or desires, you should be able to provide more impartial advice, after all. But this is not necessarily the case.
Being independent does not guarantee an advisor is any more or less unbiased than someone working for a major firm. Independent advisors don’t have a big-brother firm breathing down their backs, but this doesn’t mean they’re necessarily better than advisors working at larger firms.
“Some independent financial advisors may seem more unbiased than others due to the fact they have access to a plethora of products and/or services and aren’t swayed one way or the other,” Spiro says. On the other hand, advisors who work for a larger institution “may have a more suitable product for an investor at a lower fee than some independent advisors.”
When advisors work for a larger firm, they get the benefit of economies of scale. Much like a mutual fund offered in your 401(k) is often cheaper than the exact same mutual fund available outside your employer plan, an advisor who works for a larger firm may be able to tap into lower-cost options.
When it comes down to it, if an advisor is ethical, smart, well educated and up to date on current economic and industry trends, you should ultimately be in good hands, regardless of whether the advisor is independent, Gardner says.
“In all financial planning relationships you want to have an advisor that you know has your best interest at heart and is as focused on reaching your goals as you are,” she says. “You also want someone who is able to clearly explain to you how the strategy helps you meet your goals, and is available for you and will hear you when you are feeling uneasy with whatever life brings your way.”
She recommends looking for an advisor who has the certified financial planner (CFP) or chartered financial consultant (ChFC) designation. These show the advisor has “gone above and beyond basic licenses and are committed to their profession and to understanding how all of the areas of financial planning work together,” she says.
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What You Need to Know About Independent Financial Advisors originally appeared on usnews.com