Financial Advisors (Part 2): The 5 Different Types of Advisors

Taylor Schulte: Hey everyone, first and foremost, I want extend a big thank you to everyone who took me up on the “buy one, give one” offer for my upcoming book, More Than Money.

A number of you asked if pre-ordering the Kindle version counted towards the offer and it absolutely does, sorry I didn’t mention that. But just know that your second copy, the gifted copy I’ll be sending you, will be a hard copy of the book. But yes, pre-ordering the Kindle version absolutely works.

Again, my “buy, one give one” offer will run through the end of December. In short, if you pre-order a copy of More Than Money, I’ll personally match your purchase and buy you a second copy that you can gift to someone in your life who you think will benefit from it.

And, as a reminder, all net proceeds from the book are being donated back to non-profit organizations dedicated to improving financial literacy, diversity within the planning profession, and access to pro bono financial advice.

To support this project and take advantage of my offer, just go to www.morethanmoneybook.com, pre-order your copy (Kindle or physical), and send a screenshot of your purchase to book@youstaywealthy.com.

And then, next month, my team will reach out to grab your mailing address so we can send you the gifted copy in March when the book is published.

And if you missed the initial book announcement, go back and listen to the beginning of last weeks episode, which was part one of our series on financial advisors.

Ok, onto today’s show.

Welcome to the Stay Wealthy podcast! I’m your host Taylor Schulte and today I’m tackling part two of our series on financial advisors.

Specifically, I’m breaking down the different types of advisors and who might be a good fit to work with each type.

I’m also sharing some thoughts on how to think about paying for financial advice and measuring the value you receive.

If you’re ready to continue learning about the world of financial advisors and how to make sense of the different types you can work with, today’s episode is for you.

For all the links and resources mentioned today, head over to youstaywealthy.com/175.

These are not technical or legal terms, but at the most basic level, there are 5 different types of financial advisors:

1. Full-service advisors
2. Investment managers
3. Advice-only advisors
4. Insurance agents
5. A la carte advisors

Let’s go ahead and break each one down by starting with full-service advisors.

Full-service financial advisors, more or less, do it all. They build and maintain your financial plan, manage your investments in accordance with the plan, and help with all of the different aspects in your financial life that we touched on in last weeks episode. Tax planning, insurance planning, cash flow, coordination of retirement withdrawals, etc.

And if there is something they don’t do or can’t do, they will take on the task and responsibility of finding the right expert to bring in and help. In other words, they do all of the heavy lifting so you don’t have to.

So, with that in mind, who would be a good fit to work with a full-service advisor or full-service advisory firm? I would say it’s someone who wants to delegate everything to a professional for at least one of the following four reasons:

1. They simply believe a trained, experienced professional will do a better job than they would

2. They recognize that they are their own worst enemy and want someone between them and their money to help them avoid making mistakes

3. They don’t feel comfortable or don’t enjoy managing any aspect of their finances on their own – it stresses them out or drains their energy or causes friction in their relationship

4. While someone might enjoy it and be good at it, they might determine at some point in their life, that they want someone else to do the heavy lifting so they can go and spend time doing the things they love and value.

One final thing I want to clear up here is that, just because you delegate the majority of the work to a full-service firm doesn’t mean you won’t be an active participant or won’t have the opportunity to collaborate with your advisor on the work they’re doing. In fact, quite the opposite. I would argue that it’s critical you’re a part of the process and actively engaged. It’s helpful for the advisor to get your feedback, listen to your ideas, and take your preferences and questions into consideration.

As I always say here, there is the textbook answer and then there is your answer, and YOUR answer largely hinges on your involvement, collaboration, and communication when making important decisions about your money and your investments.

So the first type of advisor is a full-service financial advisor.

The next type is what I’m calling an Investment Manager. Investment managers do exactly that, they manage your investments in return for a fee. That’s it. No planning work, no custom financial advice, no periodic review meetings to talk about your financial needs and goals, you hire an Investment Manager to manage some or all of your investments.

Some investment managers might have one single investment strategy that they specialize in (like ESG, small cap value, international) or they might build custom portfolios based on your desired level of risk and return. Also, as you might already be thinking, some investment managers are living and breathing people and others might be computer algorithms (i.e., robo advisors like Betterment or Wealthfront).

The primary reason someone might hire an investment manager is that don’t have any planning needs – or already have their planning needs covered – and just need or want a professional to invest their money based on their desired level of risk and return. One way to find an Investment Manager is to contact your custodian, like Schwab or Fidelity. They partner with hundreds of Investment Managers around the world, some in-house and some 3rd party, to help connect them to retail investors looking for professional money management help.

The one thing to keep in mind here is that hiring an Investment Manager is like taking a prescription. If you haven’t had a proper diagnosis first – if you haven’t gone through a comprehensive planning process – then you probably shouldn’t be hiring an Investmet Manager. We want the plan, the diagnosis, to drive the selection of our prescriptions, our investments.

So, while working with an Investment Manager isn’t necessarily a bad thing, just be careful about putting the cart before the horse and hiring one before you know where you’re at, where you want to be, and what’s needed exactly to get you there.

Next, we have advice-only advisors. So, just like an investment manager ONLY manages investments, advice-only advisors ONLY provide financial advice – they don’t manage investments or implement any of the planning recommendations they make. They tell you what you need to do and then it’s on you to go take action and implement it properly.

For example, they might recommend that you do a $50,000 roth conversion this year, and then set you free to go take action and process that conversion on your own with your custodian. Or, they might suggest that you change your asset allocation and provide you with a list of securities to go buy and sell in your different investment accounts. It’s on you to actually go and buy and sell those securities, they won’t process those trades for you.

Working with an advice-only advisor might be like hiring a fitness expert to create a custom work out plan for you, but not actually join you at the gym to hold you accountable and help you implement the work out plan correctly week after week like a personal trainer would. Or it might be like hiring a landscaping consultant to tell me what lawn mower to buy, how and when to mow my lawn, and how to care for the other areas of my yard properly. They won’t actually take care of my yard for me, but they’ll tell me what I need to do to care for it properly on my own.

Now, in some cases, working with an advice-only advisor can be transactional, where you pay a one-time fee to meet with them once (or twice), get answers to your questions, receive recommendations, and then go your separate ways and implement everything on your own. In other words, they aren’t going to proactively reach out to you to see if you implemented everything correctly or schedule additional meetings to review your progress or loop you in on potential opportunities that can benefit your specific situation. So, in some cases, it’s a short-term or one-time engagement in exchange for a pre-defined one-time fee.

But in other cases, there are advice-only advisors who have an ongoing service model where you pay an ongoing fee for them to take you through their planning process, render advice, answer your questions throughout the year, and regularly update your plan as your life changes and evolves.

Going back to my landscaping analogy, it might be like an annual service contract where I pay an ongoing fee and commit to meeting with that landscaping consultant every quarter to have them evaluate my yard, tell me what else I should be doing, maybe what adjustments I should make based on the time of the year, and answer my questions as they come up. Again, they aren’t doing the work for me, but they’re providing me with ongoing guidance and advice.

If you haven’t figured it out yet, the primary reason someone might choose to work with an advice-only advisor is that they don’t need accountability or help with implementation – they just need someone to tell them what to do and maybe when to do it. They just need a professional who knows their situation to answer their questions and provide recommendations – they don’t need them to actually implement the recommendations for them or do any of the heavy lifting.

For that reason, many people working with advice-only advisors are knowledgeable do-it-yourself investors who are confident implementing recommendations on their own. Maybe even more importantly, they enjoy managing their own finances and implementing the planning work and that’s how they want to spend their time.

One thing to note here for married couples is that, while one spouse might be comfortable with this type of advisor relationship, there are cases where the other spouse doesn’t have any knowledge about finances and would not feel comfortable implementing recommendations on their own. In that case, if the knowledgable do-it-yourself investor spouse were to get hit by a bus tomorrow, the other spouse would be left in the dark and left with an advisor relationship that isn’t fitting for them.

Of course, they can find a new, more fitting advisor at that time, but that’s not a situation that everyone wants to be in after losing a spouse, and for that reason, it’s sometimes common to see couples, especially later in life in retirement, hire full-service firms just to ensure that the entire family will be taken care of if something like this were to happen.

Insurance agents. The world of insurance is complex and riddled with conflicts of interest, but I think it’s worth calling out here because they do serve an important role in the financial advice industry. Just like someone might only want to hire an investment manager to manage their investments, others might only need or want to buy an insurance product.

They might not need or want tax planning, retirement planning, investment management, or custom, ongoing financial advice. They might just need (or want) an insurance expert, an insurance advisor, to help them sort through the different insurance options, shop the market, and secure the best policy at the best price and then go their separate ways. It could be a long term care insurance need or life insurance or disaibility insurance or another unique form of insurance.

If you just have an insurance need and want to work with a living a breathign person to help you solve that need, then an insurance agent or insurance advisor might be the professional to consider.

The challenge is that many insurance experts and agents also hold themselves out as full-service financial advisors. So, while they might lead with selling you an insurance product, in many cases, they will subsequently start inquiring about investments you have that they can manage or about retirement planning needs, and offer to help you with other aspects of your financial life.

This isn’t necessarily a bad thing that they want (or can) help with other areas of financial planning – but if a financial advisor works at an insurance company, has their insurance license, and leads with insurance products and solutions, all signs point toward them being an insurance expert. I mean, if I hired a landscaping expert to help me care for my backyard, and after a few months of working together, he or she mentions that they can also replace my roof or install surround sound in my house, I would probably be scratching my head too.

Again, it’s not a bad thing that someone wants to help with other areas of your financial life, but if they are truly dedicated to being a full-service financial advisor, their firm and process wouldn’t be centered around insurance products. In fact, some of the best full-service advisory firms aren’t licensed to sell insurance at all. If they identify an insurance need through their planning process, it’s their job to shop the market to find the best policy at the best price and help you secure it, and they don’t need to be licensed to do that.

So, the primary reason someone might hire a dedicate insurance expert, or insurance advisor, is because they know they have an insurance need and just want help solving that specific need. And just like investment managers, an insurance expert could be a living and breathing person, or it could be an online service – a robo-advisor of sorts for insurance products.

Ok, the last tupe of financial advisor is what I’m calling “a la carte advisors.” In short, a la carte advisors typically work with anyone and everyone and have the capability to provide any service or sell you any product you want. Want to buy some stocks or mutual funds? They have you covered. Need a home loan? Done. Want to buy life insurance or a bank CD or municipal bond? They can do that too.

I think about a la carte advisors more as licensed order takers, not necessarily advice givers. You need or want something, pay them their fee or commission, and they’ll do it – or someone at their firm will do it.

To me, primary reason someone would work with an a la carte advisor – and I mean this in the nicest way – is that they simply don’t know any better and have had the wrong expectations about what a financial advisor actually does or what a proper advisor relationship looks and feels like.

In fact, I’ll be the first to admit that, without really knowing it, I was an a la carte advisor when I first started my career. I didn’t know any better. I also didn’t really have any expectations given that it was my first job out of school and I was just excited to have a job. But that job was really to do anything clients or potential clients wanted me to do.

If I met a business owner for coffee who had lending needs, I would pull out our brochure on business lending and play business loan expert for the morning. If a client wanted stock tips, I would give them a copy of our buy list and supporting material explaining our rational for knowing the future. If a client wanted me to sell every security in their account because they were confident a crash was around the corner, I would take their order and execute those trades.

It didn’t matter if the person was in their 20s or in their 80s, if they were employed or retired, if they had a financial plan or never wanted to go through a the planning process ever, I would do whatever they wanted or needed me to do as long is meant that I kept them happy and kept my job.

Which leads nicely to the other reason that someone might work with an a la carter advisor is that they simply like being in control and instructing others what to do and when to it. And I can understand this to a certain degree. It’s not always pleasant to have someone else tell you what’s wrong with your finances or that you shouldn’t be trading individual stocks or that you need to save more and spend less.

But if you wouldn’t feel comfortable telling your doctor what prescriptions to give you or an estate attorney what documents you need and how those documents should be written, then you may want to think twice about an a la carte advisor relationship. Or, at the very least, just ensure that you have gone through a diagnosis and have a clear plan in place before engaging an a la carte advisor and directing them what to do.

Once again, these different types of financial advisors are not technical titles or legal terms. But if you Google “types of financial advisors”, you’re going to get bunch of confusing jargon in return. My goal is just to simplify and break down the different types in a way that hopefully everyone can understand.

Because once you have an understand of the different types and potentially have a sense of what type might be best for you, then you can begin to add other important considerations into your decision making process when interviewing and evaluating financial advisors.

One of the most commonly discussed consideration when considering hiring an advisor is how they charge for their services, how much they charge, and what you, as the client, get in return.

And that’s what we will be digging into next week. But first, I do want to make a quick, general comment about fees and the different types of advisors we just reviewed today. Something to keep in mind as you digest what you learned today and as we head into next weeks discussion on fees.

Like most things in life, I firmly believe that you get what you pay for. There are exceptions, of course, but in general, and across a large enough sample size, you should expect that the value you receive is in line (or even exceeds) the fees you pay.

With that in mind, you should absolutely expect to pay a higher fee to a full-service comprehensive financial advisory firm who specializes in helping people in your exact situation than an investment manager who only manages money or advice-only advisor who doesn’t implement recommendations. Just like I would expect to pay a full service landscaping compay who maintains every inch of my yard more than someone who just mows my lawn.

In my opinion, what is most important is that fees are transparent, they are explained in a way that you can understand, and that you feel like the fees you pay a financial professional are in line (or exceed) the value you receive. And this next part is important. How YOU measure that value – not how the advisor measures their value or how they tell you to measure their value – but how YOU measure that value and how YOU measure the benefits and services you are receiving, will be wildly different than the next person.

I might find value in a fully loaded brand new luxury european car and you might not. How we value products or services and how we align that value with the money we spend is often very personal and varies widely from person to person.

So, next week, my goal is to simply help retirement savers better understand the fees that financial advisors charge and the pros and cons of the different schedules. Not so they can criticize advisors that have a fee structure they don’t agree with and not so they can negotiate the lowest possible fee, but so they are equipped with the knowledge and information needed to make an informed decision about hiring financial advisor and, if applicable, hiring the right financial advisor for them.

Once again, to grab the links and resources from todays episode, just head over to youstaywealthy.com/175.

Thank you as always for listening and I will see you back here next week.

Episode Disclaimer: This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.