Made a video addressing a popular concern about financial advisors: when they’re needed, what types there are, how to find a good one, etc. Made a very long video to answer (sorry - but there was so much to say!). To offer penance, I’ve kept the post brief: mostly just helpful links.
The most frequently asked question for me and the blog is “So, what exactly IS Risk Parity?” but after that is one that I didn’t necessarily expect and actually doesn’t have much to do with Risk Parity, per se: “How do I find a good financial advisor?” There are some variations on that, such as “What is a CFP?,” or “Do I need a financial advisor?,” but they all focus on this gap of knowledge between financial experts and the general public.
Finance is complex, and given its importance, many people are understandably nervous or unsure about how to find trustworthy advice. It’s a tough field to navigate, with an “alphabet soup” of professional designations, different types of compensation models, and some clear conflicts of interest to watch out for.
I took on the challenge with this video, and covered some of the basics of what you need to know about financial advisors. Unfortunately, it came out waaaaaay longer (38 minutes - sorry!) than I wished. I do apologize and expect some won’t make it through, but as I was assembling it there were just so many things that needed to be mentioned if I were actually going to provide good advice about good advice.
Without further ado, here is my video on the basics of Financial Advisors:
If that’s too long, here is the slideshow: same material, minus my witty commentary (so… better?).
I’ll keep the blog post short by just relaying some of the important links:
In the video, I mention research showing that people with financial advisors do better in the long term than people without. Found some relevant links, and though I don’t remember which study exactly it was, it seems like I may have been remembering the Vanguard study from 2019 referenced in both of these:
- Is It Worth the Money to Hire a Financial Advisor? by Wes Moss
- Your Money: Why people who use a financial advisor do better than those who don’t by Bruce Helmer and Peg Webb
As I mention in the video, which direction the arrow goes is still unanswered: do people get advisors and then do better?; or do people do better and then get advisors? I can’t answer that, but there is a connection. Also, in other news, ten out of ten barbers think it is about time for you to get a haircut.
Here is the slide with the “alphabet soup” - sorry that in the video I fumbled through the part on RIAs. I added links to the titles if you want to learn more:
You may like these articles on the designations, and if you meet someone with a new designation, just Google it. The list of eight above is far from exhaustive::
- The Alphabet Soup of Financial Designations
- What is a CFP? by E. Napolitano
Here are some good explanations and follow-up sources about the fiduciary standard which you should be looking for regardless of the designation:
- The Fiduciary Standard: What is It and Why Does It Matter? by Eric Brotman
- Suitability vs. Fiduciary: What’s the Difference by Ryan Fuhrmann
- 5 Misconceptions about Fiduciaries by Tim Parker
As for the three models of financial advice, these are good follow-ups to the points I make:
- It Won’t Cost You Anything to Work With Me…and other half-truths told by commission-based advisors by Phillip Christenson
- The Truth About Financial Advisors’ Services and Fees by Danielle Seurkamp
- What Is an AUM Fee, and Does it Make Sense to Pay? by Justin Pritchard
- 6 Pros and Cons of Choosing a Fee-Only Financial Advisor by Coryanne Hicks
Here is a good article describing the differences between “Fee-Only” and “Fee-Based” (by Ben Geier). The author considers the AUM model a version of “fee-on;y” which I guess makes some sense, but I would argue that it is different enough to be in its own category.
Here are the two websites that can direct you to a fee-only CFP if that’s the route you go for financial advice:
You can also do a background check on any CFP by going through the official CFP Board site.
To recap my advice from various parts of the video:
- Look for advisors who take on the role of fiduciary, which is the legal obligation to put your needs ahead of their own.
- Stay away from commission-based advisors. Insurance and annuities can be good for certain clients, but don’t ask salespeople for an unbiased view.
- Start with fee-only advice, sometimes called “fee for service.”
- They may try to sign you up for a comprehensive financial plan. I know it may seem like an upsell, but such a plan is, in general, a good idea for many.
- Be careful of “fee-based.” This is an emerging descriptor coined as a euphemism for commission-based. There are some reasons it could be a good approach, but I really don’t like how it piggybacks on “fee-only.”If fee-only isn’t enough, then consider moving up to an AUM model. The AUM model is generally the best in absolute terms, but very expensive.