The term “independent financial adviser” was originally used to describe advisers who work independently for their clients rather than representing an investment, insurance or banking company.
According to Cerulli Associates, the independent financial adviser sector is the fastest-growing segment in the financial services market, having grown assets in 2015 by 6.2 percent versus Wall Street firms, which shrunk by 1.9 percent in asset value.
Many of the most-successful investment professionals have come to realize the value of independence – both for themselves and their clients – and want to provide unbiased and independent advice.
The following are some aspects that pertain to most independent advisers:
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Independent advisers are not tied to proprietary funds or investment products. They have the freedom to choose from a wide range of investment products and services and to customize their solutions according to each client’s needs.
This freedom does not allow for a cookie-cutter approach, requiring an adviser to better understand each client’s unique circumstances. This ensures that they are properly aligning with their clients’ best interests.
Independent advisers tend to have the experience and dedication necessary to build a successful and self-directed practice. They often transition away from brokerage houses and private banks to better concentrate their acquired skills and provide local decision-making on behalf of their clients. This new-found autonomy allows them to avoid the distractions of ever-changing corporate mandates to more closely align their day-to-day operations with their clients’ needs.
As entrepreneurial business owners, independent advisers can only hold themselves personally accountable for successes and failures. They do not receive a salary and/or bonus from a company, so they have a direct duty of loyalty to their clients. The long-term viability of their businesses keeps them focused on building long term relationships.
Independent advisers tend to value the pursuit of client goals over product quotas and sales goals. As such, they typically operate on a fee-based compensation model, which is simple, transparent and incentivizes safely growing a client’s assets.
A fee-based model does not encourage an adviser to trade, unless doing so would benefit the client. It does not reward the adviser for choosing one investment over another. It simply rewards advisers who grow assets and penalizes those that don’t. When the client does well, so does the adviser’s business.
Fee-based advice requires an adviser to act in a fiduciary capacity under the Investment Advisers Act of 1940. This act requires advisers to operate under a different and higher standard of responsibility than any other financial adviser. They are legally obligated to act in their clients’ best interests, even if that runs counter to the firm’s own interests. According to PBS Frontline article of April 2013, only 15 percent of financial advisers were fiduciaries.
Independent advisers rely on third party-custodians, such as Fidelity, LPL Financial, Schwab and others, to safeguard and report on the status of clients’ assets. By placing your assets with an independent third-party custodian, you create a firewall between your adviser and your money.
A custodian acts as a gatekeeper and watchdog for your account, allowing the adviser – by your consent – to only manage and make trades on your behalf. The adviser cannot withdraw or transfer funds to an outside account without client authorization.
For many investors, this provides a reassuring system of checks and balances. Although nothing can provide 100 percent protection from fraud, working with an independent custodian and an independent adviser acting in a fiduciary capacity can greatly reduce your risk.
Gardner Sherrill, MBA, CFP is an independent financial planner with Shoreline Financial Partners. To learn more, visit shorelinefinancialpartners.com.