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Military Finances 101: Evaluating Potential Financial Advisors

Managing Your Finances

There are a lot of people out there who call themselves financial advisors. And often, what you see on their business card won't tell you much about who they really are. So, how do you slice and dice advisors? I think you should focus on three different criteria. Standard of Care, Compensation Method and Competency. Let's take a look at them.

But, before we do let me get my biases on the table. I'm registered as an Investment Advisor, I'm a Fee-Only Advisor and I'm a CFP(R) and Enrolled Agent.

Standard of Care

There are basically three groups of people who may use the term financial advisor. They are Investment Advisors, Registered Representatives of Broker Dealers and Insurance Brokers/Agents.

Investment Advisors. Investment Advisor Representatives works for Registered Investment Advisors (RIA). Investment Advisors are regulated by the Security and Exchange Commission (SEC) or their State. They are, by law, required meet a Fiduciary Standard. This requires them to act in the clients best interest.

Registered Representatives. This group works for Broker Dealers/Stock Brokers. Registered Representatives are regulated by FINRA, which is a self-governing entity. In other words, members pay dues to be regulated by FINRA. Currently Registered Reps are required to meet a standard of fair dealing. This is commonly called the "suitability" standard. In June of 2020 they will have a new standard of Best Interest. This is not the same as a Fiduciary Standard. It will be hard for the consumer to tell the difference. This new requirement, called Reg BI, is being challenged in the courts.

Insurance Agents. Insurance Agents often call themselves financial advisors. Insurance Agents are regulated by the States. They are not held to a fiduciary standard.

Compensation

Advisors can be compensated by fees only, fees and commission, or commission only. The don't always state it that way though.

Fee-Only. Advisors who are fee-only are only compensated by their client. The most common way to charge is a percentage of assets under management. Some charge a flat fee based on service level and some charge a combination of the two.

Fee-Based. Fee-Based is another, perhaps less transparent, name for fees and commission. Under this compensation model, the advisor earns a fee for services rendered and then earns commissions on the products purchased.

Commission. Advisors who are compensated by commissions are paid by their employer or by the funds they recommend a percentage of what you buy. Depending on the product (mutual funds or insurance) the commission can range from a couple percentage points to the first year's premium for an insurance product. Often, these advisors will tell you that you don't pay them anything, but the companies do. But, of course, where do the companies get the money to pay them?

Competency

It isn't too hard to become a Financial Advisor. Most the licensing tests aren't that challenging. To gain competency, advisors should earn different designations. There are a lot of them. Here are a few that I think are credible.

  • CFP(r): Certified Financial Planner
  • ChFC: Chartered Financial Consultant
  • CLU: Chartered Life Underwriter
  • CPA: Certified Public Accountant
  • EA: Enrolled Agent

If an advisor you're considering has different credentials, check them out before you assume they mean anything.

Beyond the above credentials, we think you should work with an financial planner that works with military members and retirees every day, all day. In case you're wondering...we do.


If you found this article useful, you might like the following blog posts:

Military Finances 101: Using the OODA Loop to Get Your Finances in Order


Military Finances 101: It's Not Just What You Own, It's Where You Own It


Retired Military Finances 101: Taxes





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