This episode is the second part of a multipart series on your post-divorce finances. Part 1 discussed the three essential financial goals to think about as you plan your post-divorce life. Even if you are not very far along in the divorce process, your divorce will be over at some point. Therefore, this series will help you plan for the rest of your life.
In this episode, you will get an overview of financial advisors and financial planners, including what these terms mean and how to choose one. Many people do not understand how the finance industry works. The fact is that the incentives in the finance industry are often not structured to benefit you (the investor). Financial firms are businesses, and like any business, their goal is to make money. It is very important for you to know about the different kinds of financial professionals, and how they make their money. There is one critical question to ask a financial advisor that you are thinking about working with: “How do you get paid?”
This question might seem intrusive to the average person, but it is important for you to know what kind of pay structure they are under. They may get paid directly by you, or they may receive commissions. But generally, they get a fixed fee that you agree upon. Regarding commissions, they may receive one every time you buy or sell an investment, or they may charge you a markup on the cost of the investment. Because they are compensated to sell you certain financial products, their incentives are not necessarily in your best interest.
Like stockbrokers, these professionals can be considered brokers, or they may be “dually registered,” which means they receive both fixed fees and commissions. If they state that their securities are offered by a certain financial institution, it is an indication that they are receiving commissions.
Fee-only financial advisors (not to be confused with fee-based) charge you a fixed fee— whether it is to create a budget or financial plan, or to manage your investments. In the latter case, they are often paid a fixed percentage of your assets each year. (The typical fee is 0.5 – 1%.) Fees can add up over time, so it is wise to negotiate for the best fee possible, which the next episode will discuss further.
Financial advisors are not necessarily required to act in your best interest, which surprises many people. But advisors who receive commissions can actually recommend things that are not in your best interest.
The finance industry has a word for a financial advisor who must act in your best interest: a fiduciary. This person is legally required to act in your best interest, and they do not receive commissions. They only receive a fixed fee that you pay them. So rather than asking prospective financial advisors how they get paid, you can simply ask, “Are you a fiduciary?” If the answer is “no,” you should strongly consider looking elsewhere. Brokers can be useful in certain situations, but it is important to understand how their business works. That way, you will not get harmed by it.
In the next episode, you will learn some key tips for interviewing your post-divorce financial professionals.
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