Financial Planner, Investment Manager, Financial Coach, or Broker?

In the confusing world of finance, it is easy to misunderstand the different professionals who work in the field. Posts like these are very important because there are many “financial wolves in financial sheep’s clothing!” I know that is a cheesy reference, but work with me here! What I’m trying to say is that many people who hold themselves out as a financial planner, financial advisor, or wealth manager (and a myriad of other terms) are actually just salesmen trying to earn a commission.

Is there anything dishonorable about the sales profession? Absolutely not! The problem arises with the many inherent conflicts of interest that take place during the initial meeting between the salesman (broker) and potential client. The client enters the meeting expecting the salesman (broker) to have his/her best interest at heart. But that’s not always the case. Let’s look at an example:

Imagine I am a 25 year old single male who has just received an inheritance from my grandfather who recently passed on to be with the Lord. I receive $300,000 and decide I want to use $200,000 to invest in the stock market. If I were to go to a broker (more on what a broker is later), he might recommend a mutual fund that pays him the highest commission. The problem with that mutual fund is that the fees are ridiculously high compared to other low cost index investment funds available. The other inherent problem is the mutual fund he sold will most likely be outperformed by a simple index fund. Are you starting to see the problem? The broker (salesman) wants to sell me a product that enriches his pocket book, not mine! It is clearly in the best interest of the salesman, not the client.

Who Should Use a Financial Professional

It is important to note that it’s not always necessary to work with a professional when it comes to managing the Lord’s resources. There are many high quality, low cost companies that will help you with your investment choices for very reasonable fees (or no fees at all!). My personal favorite is Vanguard. But nevertheless, some people might want or need to work with a professional. Here is a list of scenarios where a person might engage a financial professional:

• A married couple who is having trouble creating a plan they can stick to. This might include areas like budgeting, savings, spending, setting up retirement vehicles, and saving for their children’s college just to name a few.
• A busy professional who has money to invest but doesn’t have the time to spend researching and monitoring the investments.
• A small business owner looking to set up a retirement plan for he and his employees.
• A widower who has inherited money from the deceased spouse but doesn’t have the skills necessary to wisely manage the money.

There are some proponents who would tell you to never use a professional. I don’t think that is accurate. The Bible is clear that having wise, Godly counselors is a blessing!

“Where there is no guidance, a people falls, but in an abundance of counselors there is safety”  Proverbs 11:14

What You Should Know About The Different Professions

Let’s take the next few paragraphs to give some easy to understand definitions to help clear up the confusion.

Investment Manager - a person or company that charges a fee to manage your assets. Investment managers work under three business models:  assets under management, hourly, or flat fee. A typical assets under management fee is a 1% yearly fee of the total account value. So if you invested $100,000 with a company who used the assets under management approach, your annual fee would be $1,000. The hourly model is simple to understand. You are billed based on the hours it takes to manage your account. The hourly rate usually starts at $150/hour and goes up from there. The flat fee billing option is simple as well. Regardless of the size of your account, you are billed a flat, yearly fee. All fees are usually deducted quarterly from your account for all three business models. Most asset managers only deal with high net worth individuals. The reason being this business model is hard to make profitable on smaller account sizes. Many investment management firms have asset minimums of $1,000,000.

Broker  - As mentioned above, these people are primarily salesman. Most brokers are obligated to try and sell you the insurance products and mutual funds of the companies they work for. For instance, if you go to a broker who works for US Bank, there is a good chance he will try pushing you into a financial product from US Bank. Some of these products have front loaded fees, some pay a yearly fee, and some pay both. Their job is to sell you products that benefit themselves and the banks they work for, not you! This is clearly a conflict of interest. Most people who have a bad taste in their mouth with a former “financial planner” are actually referring to a former broker who sold them products that under-performed and had high sales commissions at the same time!

Again, I’m not trying to beat up on people who sell things for a living. Without a sale, no business can operate. The problem comes from the general public’s perception of the broker. When I go to a car dealer, I expect him to try to sell me a car.  When I go to someone who holds himself out as a financial planner, I expect him to put my interests above his own. That is the meat and potatoes of the problem. It is impossible to give objective advice when you are told to try and push particular products.

Fee-Only Financial Planner – A true financial planner has a fiduciary duty to the client they serve to act in their best interest at all times. They are paid a fee for their advice (like a lawyer or CPA). This fee can be a flat fee, hourly, or ongoing arrangement. They do not receive commissions and they do not sell anything but their expertise! They should be competent in the areas of cash flow planning, tax planning, estate planning, insurance needs planning, and investment analysis and review. A fee-only financial planner is often a good fit for people with higher than average incomes without many assets to invest.

Financial Coach – Like the financial planner above, a financial coach does not sell products. A financial coach usually focuses on debt reduction, cash flow planning, and savings advice. The key distinction is that a Financial Coach is not allowed to provide advice regarding securities (stocks and bonds) unless they are registered with their state or with the SEC. Many times a financial coach is a cheaper option than a fee-only financial planner. The ideal client might need accountability and goal setting help in order to get out of debt.

Wrapping It Up

I hope these definitions provide some clarity in an often confusing area. When deciding on the need for financial help, you should always look for someone who has a fiduciary duty to put your interest first. The first question you should ask a potential financial advisor is if he/she can receive any type of commission for the products they recommend. If the answer is yes, it might be time to look for someone who will be sitting on the same side of the table as you are!

Have you had any bad experiences with brokers?  Were you aware of the differences between the four separate professions?