An investment advisory company or an individual financial counselor is example of independent financial advisors. Independent advisors are unaffiliated with any major financial institutions, despite the fact that their services are often equivalent to those of any other advisor. As a result, they are not constrained by any particular interests and can recommend any financial services or products they like.
Many registered investment advisors (RIA) have thought about starting their own independent financial advisory firm at some point in the past. However, the qualities that make a person an effective advisor at a bigger firm don’t often convert into the skill sets required to run a solo enterprise. The transition to independence might feel unpredictable and frightening for those who often prefer the stability of a position at a large company with a consistent income. It also necessitates a good amount of time, planning, and risk tolerance. When leaving a large firm to start their own business, many advisors lose clients, therefore patience is also vital if a substantial payday is the goal. But there are several fundamental actions that any counselor may do to ease the transition.
What constitutes an independent financial advisor?
A financial advisor assists clients with a range of issues related to personal financial planning and investing. They frequently collaborate with customers to create investment policy statements that describe the client’s risk tolerance, financial status, time horizon, and other details that can assist the adviser work with the client appropriately and efficiently. Regardless of whether they are independent or not, these services are typically considered to be the minimum requirement for all financial advisors.
The distinction between an independent advisor and a non-independent is evident just by looking at who owns the company and whether they have any direct affiliations with other (often larger) firms. These qualities are in direct connection with a firm’s independence, as connection with another firm might affect how an advisor interacts with a customer. Independent firms and advisors run entirely independently, which frequently affords them more flexibility in how they conduct business.
How to determine them?
Asking your financial advisor whether their firm is independent is the best method to learn this information. It’s not too tough to make the distinction on your own, though. Big, well-known advisors typically aren’t independent because independent companies and advisors aren’t connected to larger institutions. Even registered representatives of larger firms who work in the financial industry are not autonomous.
Be aware of advisors who can only offer you a small selection of investment items when you’re looking for one to deal with. If you observe this to be the case, it is clear that the advisor is not independent. Non-independent advisors frequently provide alternatives like investment funds and insurance plans that are connected to their parent organization. Although this isn’t always a bad thing, an independent advisor might offer a wider range of services.
It’s also crucial to keep in mind that independent advisors might be either people or businesses. Similar to parent corporations, independent advice firms are not beholden to any special interests. Independent advisors can work for independent advice firms or for themselves.
Advantages and disadvantages of hiring independent financial advisors
Although there are usually more benefits than negatives to working with an independent financial advisor, it’s vital to understand how they compare. First off, independent advising businesses are frequently owned by the advisors who work there, allowing for intimate client ties. A large, non-independent company, however, could come across as less friendly. Working with an independent advisor also ensures that the advice you receive is completely unbiased and not affected by any other pressures. Non-independent advisors could experience constraints in how they can invest your money and frequently use predetermined investing plans. Independent advisors might be able to build your portfolio a little more specifically.
Independent advisors typically maintain your funds in a secure location with the help of third-party custodians. As there is no conflict of interest with your advisor maintaining your assets at his or her own firm, this is frequently advantageous. Working with a non-independent advisor who owns your assets at the same financial institution, like Charles Schwab or Fidelity, may be more convenient for some people, though. Working with an independent financial counselor may have the additional drawback of limiting your alternatives for financial experts with specialized experience. For instance, larger, non-independent organizations might employ a large number of advisors with expertise in estate planning, ETFs, or other specialized requirements.
Independent or non-independent financial advisors – that is the question
The ability to operate entirely independently, free from interference, supervision, or regulations from a bigger body, is what distinguishes an independent financial counselor from a non-independent advisor. It is frequently a requirement for non-independent advisors to offer securities and other financial products through a certain company. They possess limited ability to provide recommendations to clients. In contrast to a smaller independent firm, advisors at non-independent firms will probably have access to more research resources. The support of a large firm has its inherent benefits, even though this does not always translate to better investment performance.
The fee schedules of independent and non-independent firms may also be different. Many independent advisors are fee-only, which means that their only source of compensation is the advice fees they receive from clients. They do not receive commissions from other businesses for recommending their line of insurance or financial products. The aforementioned commissions are, however, paid to fee-based advisors. Due to their association with a larger business, non-independent advisors may stand a greater chance of receiving such commissions and may therefore be more motivated to suggest such deals.
To sum up
When looking to hire someone to assist with money management and future financial planning, an independent financial advisor is frequently the best choice. Although independent and non-independent advisory services may function similarly, you may benefit from the higher caliber and wider range of counsel you’re likely to receive from an independent advisor. You can be sure that any RIA is working in your best interests because there are no external forces pressing them to offer specific items or behave a certain manner.
