What Is a Financial Consultant?
Rebalance’s Sally Brandon talks to U.S. News about the difference between a financial consultant and a fiduciary, and emphasizes the importance of having a highly credentialed expert at the helm of your finances.
The financial services industry employs a mix of professionals who use titles interchangeably, such as financial consultants and financial advisors, to guide people on how to invest their money for retirement. These titles can be confusing to investors when they are hiring someone to manage their assets.
“The financial services industry has a long history of playing semantics with titles for financial professionals,” says Daren Blonski, managing principal of Sonoma Wealth Advisors in California.
Industry regulators, professional associations and consumer groups have battled what financial professionals should be allowed to call themselves. The financial services industry has long used titles as a way to shape consumer perception. “Looking beyond the title is critical to understanding the structure of your relationship with an advisor or financial consultant,” he says.
“If they are not willing to serve in a fiduciary capacity to you, then what they call themselves is meaningless and you should walk away,” he says.
While many people are more familiar with titles such as a financial planner or a financial advisor, some industry experts refer to themselves as financial consultants. “There is no official definition of what a financial consultant or advisor can provide,” says Sally Brandon, Senior Vice President of Client Services at Rebalance in Palo Alto, California.
Some people will hire a financial consultant to solve an immediate financial problem, such as when they inherit money from a family member. Financial consultants help clients see their blind spots, such as understanding the repercussions for withdrawing money from an individual retirement account, or IRA, before turning 59.5 years old or the consequences of making emotional decisions, says Shehara Wooten, a certified financial planner and founder of Your Story Financial, based in Dallas. “We help people eliminate what’s blocking their view,” she says.
Since the industry does not have an official definition, it is more critical to hire someone who is a fiduciary, which means they are acting solely in your interest, Brandon says. Working with a certified financial planner (CFP) is a good idea because this person has gone through the extra steps of receiving their certification and it “speaks to their knowledge, expertise and commitment,” she says.
The key to determining whether a consultant is the same as an advisor is to look at their credentials and whether they have a CFP or chartered financial analyst (CFA) designation, says Charles Sizemore, chief investment officer of Sizemore Capital Management, a Dallas-based registered investment advisor. The role of a consultant can be varied and that person might give planning advice, serve as something along the lines of a financial “life coach” or actively manage an investment portfolio or any combination, Sizemore says.
Brokers and insurance agents have been able to call themselves advisors in the past, but they can not charge fees and should only be compensated by commissions, says Bill DeShurko, president of 401 Advisor, a registered investment advisory in Centerville, Ohio.
A new U.S. Securities and Exchange Commission requirement called Regulation Best Interest (Reg BI) states that as of June 30, a consultant and an advisor are not the same things. A broker or a commission-only representative cannot use the term “advisor” or “adviser” anymore. The only people who can use the term are those that are registered with the SEC or a state as an investment advisor known as an RIA. Watch out for the experts who offer “free” financial planning, he says. The plans developed by them are “skewed to show insurance needs or overstate the tax advantages of annuities since these are typically high commissioned products to pay for their ‘free’ advice.”
How to Determine When to Seek Financial Advice
Some people seek out a financial professional when they have longer-term goals such as buying a house or saving for college tuition, says Zehra Candler, a financial advisor at Genesis Wealth Management in Tampa, Florida. Individuals who do not have a lot of assets or do not want to pay for ongoing advice can turn to certified financial planners, where they can pay a one-time fee to receive a plan and recommendations.
The timing of when to hire a financial consultant or advisor depends on how much money you have to invest. People who are younger and just starting to put some money into a 401(k) plan might find that hiring an advisor might be unnecessarily expensive, Brandon says. People might find that hiring a financial advisor is beneficial if they are working at their second or third job, have previous 401(k) balances or IRA accounts, and have other goals such as taking care of aging parents or other financial concerns besides just retirement, she says.
Individuals who are willing to do some research on investing and tax concepts and have a fairly simple financial situation might not need a consultant, Sizemore says.
Having a good consultant can be “really instrumental in getting your retirement planning off to a good start even if you have minimal assets to invest,” he says. “The larger your nest egg, the more important good advice is because any mistakes become a lot more costly.”
People who are just starting to invest in their retirement will find that there is no shortage of online tools and apps to get started. A consultant can help investors manage a portfolio or review current holdings, says Keith Huber, managing director of retail sales at E-Trade, an Arlington, Virginia-based brokerage.
“The role that a financial consultant can play is especially relevant during times like these when investors may be subject to emotional decision-making,” he says. “Financial consultants can help you plan your investments to weather the storm and stay the course when times get tough.”
Expect to Pay Fees
While some investment advisors are paid commissions to sell products, others are paid as a percentage of total assets. Hiring a financial planner could be worthwhile because they help people develop a financial road map to help people as they start a career, Brandon says. “You can revisit it when you get married, have children, purchase a home or advance your career,” she says. “Financial planners are typically paid by the hour. We recommend that you stay away from someone who earns a commission on recommending a specific mutual fund or stock, as you don’t know that they are acting in your best interest.”
One of the big ways to tell if you have a broker or an advisor is to determine how they are paid, says Ron McCoy, CEO of Freedom Capital Advisors in Clermont, Florida. Brokers make money charging a commission or a markup, which can be hidden to unsuspecting customers. “There is no such thing as free,” he says. “You’re going to pay somewhere along the line and need to know the difference.”
A financial advisor has a fiduciary duty to put your interests first and is paid an advisor fee typically based on the account value. “It allows the advisor to look out for the client’s interest and clients can see the fees upfront and nothing is hidden,” he says. Some consultants are paid by the hour similar to how an attorney or a CPA is paid, or they may receive a flat fee, Sizemore says.
This is appropriate if the consultant’s role is to serve as a financial planner. If the consultant is conducting ongoing portfolio management, then they will generally be paid as a percentage of the assets managed, which is often around 1% annually. In the traditional brokerage model, a consultant might be paid a commission for a mutual fund or annuity sale, although this model is shrinking.
Why Paying for Financial Advice Is Valuable
While most investment decisions can be reduced to fairly simple rules of thumb, such as lowering your exposure to stocks as you get older, sometimes people just need a sounding board. “You can do the research and believe you’re on the right track, but an experienced professional can help you find any potential land mines and generally keep you out of trouble,” Sizemore says.
Research has demonstrated that people often misjudge their own capacity to withstand ups and downs in the market and overestimate their risk tolerance, Brandon says. Or they underestimate it and stay in unrewarding investments for long periods. “Good financial advice helps clients understand who they are, how long they have to invest and what mix of investments will get them to their long-term goals at the lowest level of acceptable risk,” she says. “It has been shown by Vanguard that having an advisor actually adds return to your investments precisely by talking you off the ledge when markets get rocky. Vanguard puts this number at about 3%.”
Market volatility can make investors wary, but a good advisor can help you withstand it, says Haleh Moddasser, a partner at Stearns Financial Group in Chapel Hill, North Carolina. “Behavioral finance is one of the leading causes of financial failure,” she says. “This is when people panic and sell low or get greedy and buy high. It helps to have someone talk you off the ledge.”
Many people do not spend enough time on the potential mistakes that can derail their financial lives, such as buying a vacation home they can’t really afford, retiring too early or agreeing to a financial settlement surrounding divorce without understanding or considering the long-term implications, Moddasser says.
“These issues often dwarf a perfectly sound investment strategy,” she says.
