Financial advisers: Friend or foe?

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Commentary: At the beginning of 2015, nearly 90 million Americans were covered under a defined contribution plan and investments in DC plans totaled $6.5 trillion dollars. According to Vanguard’s annual report “How America Saves 2015,” the median participant account balance on their recordkeeping platform increased 137% between 2004 and 2009. The growth in these accounts, along with the lack of investment experience and financial knowledge of many participants, makes these potential investment dollars a hot commodity for financial advisers.

There are a variety of “financial advisers” in the marketplace, with myriad titles, credentials and offers of how they can help your employees retire successfully. Many of these individuals are from reputable firms with good intentions, but others may try and take advantage of employees using complimentary dinners and “no obligation” seminars as a way to incent employees to purchase products that may not be in their best interest. It is important that employees make an informed decision prior to engaging the services of any adviser.

Also see:Financial advisers engender savings discipline.”

As plan sponsors it is important that you understand the difference between a fee-for-service adviser and a broker adviser. If you offer investment advice services as part of your retirement package to your employees, make sure you understand what types of products and services your adviser is offering and at what cost. It is important that you and your employees understand that no adviser works for “free.”

Fee-for-service advisers generally provide objective advice and guidance to help employees achieve their financial goals. This type of adviser is registered with the Securities and Exchange Commission and state securities regulators and typically works for an independent firm, not associated with an investment company or product. These advisers are licensed to provide investment advice for a fee and those fees are their only source of revenue. The fees may be calculated on an hourly, flat or percentage of assets basis. Many of these advisers are Certified Financial Planners who offer a fee-only model and place clients in products from a variety of companies based on the client’s individual needs.

Also see:Why employees need 401(k) investment advice.”

Broker advisers are licensed to sell investment products and are typically employed or supported by a broker dealer and in some cases an insurance company. These reps have applicable state insurance licenses and are required to be registered with FINRA and hold at a minimum a Series 6 or 7. Many of these advisers are also Certified Financial Planners but they may be required to sell only their company’s investment products and services. Broker advisers may receive commissions from the products they purchase and sell, along with trailing commissions paid on a monthly, quarterly or annual basis. Some charge fees based on assets which can be deducted from assets or billed directly.    

The following are questions you and your employees should ask prior to hiring a financial adviser. 

1. Have you worked with and are you currently working with companies/people like us?

2. What are your credentials?

2 a. Professional designations, licenses, professional associations

2 b. If a Registered Investment Adviser, ask for a copy of their ADV Part II

3. Do you have a particular investment philosophy?

4. How do you communicate with clients?

5. What sort of resources do you use and have available?

6. How do you get paid?

7. What are all of the services provided for your fee(s)?

8. What, if any, services would subject me to additional fees?

9. Are you willing to provide references from clients like us/me?

Remember not all employees need a financial adviser, but for those who do, making an informed decision should provide a better outcome.

Marianne Marvez is a vice president with Innovest Portfolio Solutions LLC.

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