Often, when talking to prospective clients, there can be some confusion about the types of professionals you can engage with to support you in developing an investment approach. Too often, in fact, I hear the titles “Registered Investment Advisor” and “Financial Planner” used interchangeably. While it’s not exactly the end of the world, I feel that it’s important to draw a clear distinction between the two–because there are some VERY important differences that you should be aware of. Additionally, it’s key for you to know WHY you need a Registered Investment Advisor.
What is a Financial Planner?
Let’s start with by taking a look at Financial Planners. What exactly IS a Financial Planner? If you’ve been in the workforce or have run a business for any length of time, you’ve definitely bumped into at least a few. A Financial Planner might be an Insurance Agent, Stock Broker, or a Broker Dealer.
A Financial Planner has a few definitions. The dictionary defines Financial Planner vaguely as “a person employed to manage the personal finances of clients”. Doesn’t seem to be a lot of criteria or requirement in that definition, does there?
Investopedia.com does a better job of defining the role:
“A Financial Planner is a qualified investment professional who helps individuals and corporations meet their long-term financial objectives by analyzing the client’s status and setting a program to achieve that client’s goals.”
Financial Planners are qualified to do the work involved, and are regulated by state insurance regulators or the Financial Industry Regulatory Authority (FINRA). And according to The Balance, Financial Planners commonly make money in any of the following 6 ways:
- As a percentage of the assets they manage for you, usually 1 – 2%.
- Commissions on products you buy through them–usually insurance or financial.
- Fee-based, which is a blend of commissions and fees.
- A predetermined hourly rate.
- On a project basis, they might be compensated with a flat fee.
- Retainer, either quarterly or annual.
Finally, there are two types of Financial Planners: Financial Planners where, according to the same Wall Street Journal post, “anyone can hang out a shingle as a financial planner, but that doesn’t make that person an expert.” Or a Certified Financial Planners who are “licensed and regulated, plus take mandatory classes on different aspects of financial planning”. The CFP® Board has set a professional standard for planners but here too the rules are “cloudy”. According to CFP.net if you are a planner that provides “financial planning services” you will be held to the duty of care of a fiduciary. If your planner does not provide financial planning services they are expected “at all times to place the interest of the client ahead of his or her own”. They are required to make recommendations that are “suitable” to your “financial profile” but aren’t required by law to work in your best interest.
I’ll come back to this point in a moment.
What is a Registered Investment Advisor?
In a nutshell, a Registered Investment Advisor is a professional advisor or practice (firm), that is registered with the state security authority OR with the SEC (Securities and Exchange Commission). In addition, Investopedia notes that “RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to provide suitable investment advice and always act in their clients’ best interests.”
A Registered Investment Advisor is compensated via clear and transparent asset management fees, usually as a percentage (1 – 2%) of the assets you have under management with the advisor. Learn more about the difference between a Fiduciary and Non-Fiduciary Investment Advisor.
The Difference Between a Financial Planner and a Registered Investment Advisor
There are two key differences between a Financial Planner and a Registered Investment Advisor: how compensation is determined and billed, and whether or not the professional is required by law to work in your best interests.
- Compensation. If you look back to how a Financial Planner is compensated, you’ll see a variety of ways they can make money that result in little clarity on how much you’re actually being charged. Conversely, a Registered Investment Advisor is compensated only through a percentage of the assets that they manage. There are no hidden fees, percentages, commissions, etc.
- Your goals and interests, or those that put the most money in your planner’s pocket? It’s been estimated and demonstrated in an easy-to-read map by the Economic Policy Institute that each year, financial advisors with conflicts of interest cost retirement savers here in New Hampshire $188 million.
Behind that number, the EPI notes “The map shows the annual costs to retirement savers of the underperformance of IRA assets that are invested in products for which savers received ‘conflicted’ advice (advice provided by financial advisers whose earnings depend on the actions taken by the client)… Underperformance of investment returns in which savers received conflicted advice can be due to a wide range of factors, including high fees, high trading costs, poor market timing, and increased risk exposure without increased returns.”
A Registered Investment Advisor, on the other hand, is REQUIRED BY LAW to provide you only with advice that is in your best interest. Essentially, an RIA is required to give you the best advice for you–where a Financial Planner (as we noted above) only needs to make recommendations that are “suitable” for you.
Why Do You Need a Registered Investment Advisor?
If you are interested in having your money invested in a manner that is focused on achieving your goals–and your interests–and not potentially become the victim of investment fraud–you need to choose a Registered Investment Advisor to help you build your financial plan.
Also, if you’re concerned with hidden or variable fees, you’ll want to work with a Registered Investment Advisor.
Develop an Investment Approach that Aligns with Your Goals and Values
At Granite Investment Advisors, we take a value-based investment management strategy. This proven investment methodology is based on fundamental analysis and strict investment policies. And while our methodology has been honed over 30 years, our approach to executing on this methodology evolves as technology empowers us, and history instructs us.
If you are considering a Registered Investment Advisor here in New Hampshire, but aren’t quite sure, begin by understanding your personal investment risk tolerance with our Riskalizer. This will start to help you understand what type of investment approach you want to take when determining what to do with your investments as you mature. It can also help you understand if your current investment portfolio fits your personality. Try it today!
Past performance is no guarantee of future results. Returns are presented net of management fees. There can be no assurance that any of the securities referred to herein were produced for or remain in portfolios managed by Granite Investment Advisors. A complete list of all Granite Investment Advisors’ recommendations within the preceding year is available upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities described herein.