The role of traditional and online financial advisors

Don’t know the difference between a financial advisor, registered investment adviser or retirement planning consultant? You are not alone.

don't pay financial advisors fees

Invest directly and save financial advisor fees

Most people glaze over when the conversation turns to investing because of the heady terms and jargon used by professionals. Our goal is to include everyone in the discussion by using plain English.

Traditional Financial Advisors
Financial advisors are salespeople dispensing advice with the intent to sell you a financial product. However, once they have sold the product, they have no further obligation to you. They are also referred to as: financial consultants, investment consultants, registered representatives or financial planners.

Here is an overview of different types of financial advisors for Individual Retirement Accounts (IRA):

Type of advisor
One-time commission
Charges fee based on assets under management
Monitors funds after sale
Operates in your best interest
Operates in their firm's best interest
Traditional Financial Advisor
- Salesperson (Stockbroker, Broker, Broker-Dealer)
- Fiduciary (RIA)**
- Salesperson and fiduciary (Dual registrant)
Online financial advice services
* Registered Investment Adviser (RIA) is held to the “fiduciary” standard (meaning they should keep track of your investments and keep you informed). According to the Department of Labor, the problem is that many RIAs don’t keep you informed because of a loophole in IRA law that says even if you are paying an ongoing advisory fee, RIAs do not legally have to monitor your investments on an ongoing basis. Many RIAs take advantage of this loophole.

If you need a financial plan, you should pay an hourly fee to have the plan developed. However, many financial advisors use a “Plan” as a sales tool.

A good financial plan examines your entire financial picture and develops a detailed plan for achieving your goals. However, be careful of financial plans that recommend the products the advisor sells. This not only limits your choices and increases your costs, but often fulfills the advisor’s commission and sales goals, instead of offering you the best possible solution.

Financial advisors also may have a hidden agenda – to gather as much of your money to manage as possible because they are paid an annual fee based on the total amount they manage (called assets under management). Fees tend to range from 1.0–2.5%. If you must use a financial advisor to develop a financial plan, find one with a CFA designation and simply pay an hourly consultation fee. Never pay a fee based on assets under management, for an advisor to manage mutual funds, where you are already paying the portfolio manager a fee to do so. However, if the RIA, with a CFA designation, is managing a portfolio of individual equity/bond securities in a separate account, they should be paid a management fee since you are not investing in a mutual fund and paying the portfolio manager a fee.

Online Financial Advice Services
These are new services growing in popularity since the 2008 economic meltdown and the advent of mandatory disclosure of 401(k) fees in 2012. Entrepreneurs are looking to develop new business models harnessing Internet technology. People are looking to reduce the fees they pay for financial advice, which we applaud! However, lower fees are only half of the picture.

Online Financial Advisor fees are lower than traditional financial advisors, typically ranging from 0.25–0.95% of assets under management.

The problem is the quality of the advice, which is often based on unproven strategies or computer modeling without history. Perhaps in 10 years, the computerized advice models will be up to par with established and transparent track records of performance. The risks are too great to go with an unproven investment advice strategy today.


Comments are closed.