Updated on Friday, October 29, 2021
An independent financial advisor is one whoâ€™s unbound from larger financial institutions. As such, they can work independently or as part of an investment advisory firm. The potential benefit of working with an independent financial advisor is that they may be less likely to promote particular products or services, which could lead to fewer conflicts of interest.
When entering into a relationship with an advisor, itâ€™s important to know how theyâ€™re compensated and which companies they work with, as some advisors receive commissions or other incentives to promote certain products or services. Even if an advisor is independent, you should still evaluate them on an individual basis.
Here are some of the key differences between independent and nonindependent financial advisors:
|Independent advisors||Nonindependent advisors|
|Ownership||Often self-employed or partnered with other independent advisors||Employed by large investment or brokerage firms|
|Offerings||Able to provide broad services unrelated to a specific company||Sometimes tied to proprietary financial products|
|Resources||May have some limitations relative to investment and brokerage firms||Able to maximize research and analysis capabilities of large companies|
|Fee structures||Often (but not always) fee-only with no commissions||Often (but not always) fee-based with commissions|
|Custodianship||Assets generally held with a third-party entity||Assets generally held with the advisorâ€™s employer|
As you can see from the table above, there are upsides to working with both independent and nonindependent advisors â€” as well as downsides â€” which weâ€™ll cover in more depth below.
The differences between financial advisors who are considered independent and those who arenâ€™t can be subtle. An important distinction is that independent advisors normally work for themselves or as part of a small independent advisory firm, while nonindependent advisors generally donâ€™t. Because independent advisors donâ€™t operate as part of a larger financial institution, they arenâ€™t tied to the products of a specific brokerage or investment firm.
â€śWhere an advisor who works for a specific firm may be required to use that firmâ€™s proprietary investment products, insurance products, and technology, an independent advisor has more freedom in selecting investments and products from the broader universe of providers,â€ť explains Jeffrey McDermott, a Florida-based certified financial planner (CFP) and founder of Create Wealth Financial Planning, a fee-only financial planning firm.
An advisorâ€™s fee structure is another way to help determine whether an advisor is truly independent or not. Investment advisors who are fee-only are paid directly by their clients and donâ€™t earn commissions for selling certain products. But if an advisor acts as a representative for a broker-dealer or as an insurance agent, earning commissions for selling certain products, that may be a tipoff that theyâ€™re not independent.
â€śWhat differentiates independent from nonindependent advisory firms are ties to a bank, broker-dealer, mutual fund company, or insurance company who may incentivize sales of certain investment or insurance products,â€ť said David Huebner, the founder of Huebner Financial Planning in North Dakota. â€śAdvisors at these types of companies are usually told what they can and cannot sell or invest client funds into.â€ť
Before entering into an agreement with a financial advisor, be sure to determine whether there are incentives that may lead them to recommend investment strategies or financial products that may not be in your best interest.
Every financial advisor has their own preferences when it comes to investments. Those preferences arenâ€™t necessarily biases, but they do inform how the advisor guides their clients.
Financial advisors who are truly independent usually offer financial planning and investment management services that arenâ€™t affected by incentives set by an employer or their fee structures. But even those financial advisors may have their own priorities and preferences when it comes to investing.
When looking for a financial advisor, whatâ€™s important is to be sure to find an advisor whose outlook mirrors your own and who is fully transparent.
Choosing the right financial advisor can sometimes be a challenge, especially if you donâ€™t know exactly what youâ€™re looking for. MagnifyMoney has resources to help you find a financial advisor, and you can also check out industry search tools. NAPFA, for instance, offers a tool to help you find a fee-only financial advisor.
During preliminary interviews with potential advisors, you can ask how they are compensated and whether they may have any potential conflicts of interest to assess their independence. You can also check a firmâ€™s Form ADV filed with the SEC to see who owns the firm â€” this can reveal if an advisor is part of a larger organization.
Of course, there are plenty of factors to consider when choosing a financial advisor beyond just whether or not they are independent. Youâ€™ll also want to look for someone who has experience serving clients with situations similar to yours, who offers the services you need, and who you feel like you can trust to help you build your financial future.
The â€śFind a Financial Advisorâ€ť links contained in this article will direct you to web pages devoted to MagnifyMoney Advisor (â€śMMAâ€ť). After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMAâ€™s referral program, which may or may not include the investment advisers discussed.