Be knowledgeable about your financial adviser

In a 2015 study conducted by PricewaterhouseCoopers, only 27 percent of millennials surveyed had sought out professional advice on savings and investments within the past five years.

With the Internet, millennials’ home away from home, why would anyone pay for advice? After the Great Recession and the fall of Bernie Madoff, both of which took place during millennials’ formative years, why would anyone trust Wall Street? In the spirit of free advice, I’ll offer some.

The financial services industry is constantly evolving, as is the global economy, the U.S. economy, the various asset classes and individual investment opportunities. Rules are in flux. Everyone’s financial picture is unique, and therefore, so are their needs. For the average person, staying on top of everything is nearly impossible. And trustworthy advisers do in fact exist. Hint: One is talking to you right now!

Hiring a financial professional is a big step. Let’s start, then, with a baby step: defining the professionals, divided into two main camps, who dispense financial and investment advice for a living.

Registered investment adviser (RIA)

The terms “money manager,” “investment consultant” and “financial planner” are thrown around a lot, but all are essentially synonyms for “investment adviser.” A registered investment adviser, or RIA, is a firm or person that is paid to give advice about investing in securities. RIAs are independent, meaning they don’t belong to a bigger financial firm, and though they oversee and manage their clients’ assets, those assets are “held away” by a third-party custodian such as Pershing, Schwab or Sterne Agee, adding an extra layer of security for clients.

Be aware that the word “registered” lends no special credibility or validation upon an adviser. It simply means that the person or firm in question is either regulated (registered) by the Securities and Exchange Commission (SEC) or their state securities agency (depending on how much money they manage). You should get online, do some research and get recommendations when choosing an investment adviser, just as you would a lawyer, doctor or general contractor.

Broker-dealer

The term “stockbroker” typically refers to a broker-dealer, by definition a person or firm primarily in the business of buying and selling securities. They are not regulated by the SEC like RIAs, but rather the Financial Industry Regulatory Authority (FINRA). Broker-dealers have historically been employees of big banks or “wirehouse” firms such as Morgan Stanley, Bank of America’s Merrill Lynch or UBS, but recently there’s been an increase in the number of broker-dealers who work not as employees, but independent contractors of these parent firms. Since both broker-dealers and financial advisers can help clients make financial decisions, you might be scratching your head at this point wondering, “yeah, but what’s the difference?”

Suitability vs. fiduciary standards

Here’s where the two diverge in a big way. Broker-dealers are only legally bound to a suitability standard in their client relationships. That means a broker-dealer must prove a product is suitable for a client, though it might not necessarily be the best product for them. An investment adviser, on the other hand, must have their client’s best interests in mind at all times — they must in fact place the client’s interests above their own interests. It’s called a fiduciary standard. See the difference? It’s a higher bar.

How does each get paid?

Now we get to the important stuff: money. Do you know exactly how much you’re paying the person who manages your money? An investment adviser (RIA) is paid based on the investment advice they offer. Often they are paid a certain percentage of your assets that they manage. Therefore, they get paid more as the value of your account increases — a built-in incentive for the adviser to make good decisions and grow your wealth. Conversely, a broker-dealer is paid on the sale or purchase of financial products, normally in the form of fees and commissions. There are other compensation models, but these are the traditional two and still the most common.

Just know that is there is no right or wrong way to have your money managed. You need to figure out what works best for you and your family. But be knowledgeable about to whom you’re entrusting your assets, how seriously they take your interests, and how and how much you are paying them.

Jennifer Pagliara is a financial adviser with CapWealth Advisors, an independent RIA and a proud member of the millennial generation. Her column, which appears every other Saturday in The Tennessean, speaks to her peers and anyone else who wants to get ahead financially.

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