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In a perfect world, all financial advisors would have your best interests at heart. Giving someone else the power to invest your money, make financial recommendations, and guide you in achieving the financial future of your dreams is a decision that shouldn’t be made lightly.
A recent CapIntel survey found that 72% of investors say trust is the most important quality when choosing an advisor, followed by experience and a holistic approach. Does this mean it is best to go with a well-known financial institution, or is there an advantage to working with an independent advisor?
After 20 years in the financial sector, I started noticing large corporations tend to ”control” their advisors. Typically, this happens for the sake of compliance or profits — it’s rarely done for the sake of benefiting the client. As an independent advisor, I’m able to work for my clients in a way that corporate firms don’t allow. I have the freedom to assess my client’s needs and search the financial landscapes to find the correct solutions to meet those needs.
Large firms, on the other hand, don’t have that ability. They often use a cookie cutter approach, forcing their advisors to offer only certain solutions, whether the selection includes the best option for the client or not. However, independent advisors walk a different path. They have the ability to put their clients’ needs first, which is known as the independent advantage.
A Crucial Distinction
Understanding the difference between captive financial advisors and independent financial advisors is also key to helping you pick the best advisor for you. Captive advisors are just that — captive to one employer. This means that all solutions, products, and guidance they offer must come from a pre-selected list created by their employer.
But as you may already know, financial management doesn’t follow a ‘one-size fits all’ model. Everyone’s situation is different. Independent advisors offer a very different experience. They are not beholden to any one company or employer, giving them the ability to search for the solution that best serves the client and allowing them to operate as a fiduciary.
Advisors who are registered fiduciaries carry the “Fiduciary Responsibility Burden,” also known as the “Fiduciary Standard.” According to this standard, “all advisor recommendations must be in the client’s best interest, even if it is not in the advisor's best interest.” For example, let’s look at the difference between a Class A share stock recommendation and a Class I version of the same stock. They are the exact same underlying stock, but the Class A version pays a commission to the advisor that generally drags on the performance of the stock.
Digging deeper, let’s assume a Class A stock pays a 3% commission and the Class I stock charges no commission. If the Class I stock had a 10% gain in 2023, and you’re invested in the Class A stock, you would have only generated a 7% gain in 2023 due to the 3% commission. Furthermore, if a registered fiduciary advisor recommended Class A stock due to the commission, that would be a violation of Fiduciary Responsibility because they recommended an investment that ultimately served in their best interest, not yours.
The cost associated with hiring a financial advisor is a key reason many choose not to hire one. A 2024 survey by YouGov found nearly 50% of Americans said they were concerned about fees. When it comes to independent advisors versus captive, independent advisors generally charge the same or lower fees than those working under big firms. That’s because big firms must carry larger overhead costs, which can lead to higher fees. Independent firms are usually slimmer and nimbler, requiring few overhead costs and generally more competitive fees.
Evaluating Your Choice
If you’re making the decisions between hiring an independent or captive financial advisor, it’s important to weigh the pros and cons. A large firm can present an illusion of safety through numbers, but they may also view their clients as another profit margin opportunity. Of course, captive agents can also offer exclusive products on behalf of their firm. They’re called proprietary products and are only available through the firm. They’re not sold by independent brokers or other companies. But an independent advisor has complete freedom to offer solutions that are best suited for their client. That said, searching the financial universe to find the right solution requires the advisor to be diligent and enthusiastic toward success.
If you’re concerned about hiring an advisor who acts in your best interest, bring this up upon meeting them. If you’re working with stock market advisors, ask them how they’re getting paid. Independent advisors typically have a transparent and simple fee structure, whereas captive agents must operate under the structure set forth by their employer. This could lead them to hide or obscure their fees.
When it comes to insurance planning specifically, I always recommend asking the agent if they’re confined to any one insurance carrier, or if they can offer many carrier’s products. If they’re unable to answer this question immediately and clearly, they’re likely not independent.
Finding the best financial advisor for you is no overnight decision. Understanding the difference between a captive versus an independent adviser and the ways in which they operate puts you one step closer to making that choice. In addition to doing your own research, consider recommendations from family and friends, and interview your prospects. It’s important to find an advisor who is open and trustworthy, and who has an understanding of you and your needs.
Kelly Gilbert is the co-founder of Eminence Financial Group. He brings more than 20 years of experience to the finance industry, particularly through small business and process improvement consulting. He is the co-author of Future Proof Investing and carries more than a decade of insurance strategies and financial investing advice experience to the industry.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.