Different Types of Financial Advisors

There are lots of options when it comes to financial advisors for federal workers, so much so that weighing the pros and cons of each can be an overwhelming experience. But, whether they claim to be the best type of advisor or not, it would make sense for you as an employee to look into the different types of financial advisors (and how they get paid from you) before you start seeking their council.

There are typically three things you want to look into when selecting an advisor. How do they do business, including their compensation? Are they acting in your best interest, and does their advice seem to reflect that? And are there any conflicts between the advice they are giving and the amount they’re able to collect for their services?

There are several specific types of financial advisors, which will discuss now.

First, you have the insurance agent, who makes all their money through an upfront commission, without any recurring forms of payment occurring later. Insurance agents are agents because of their business, which is sales, which would normally be annuities, like EIAs, or Equity Indexed Annuities, or FAs, or fixed annuities. They also sell term, whole, or universal life insurance.

Insurance agents will not offer up advice when it comes to investing because that is out of their purview.

The commission they take can vary depending on what you purchase after a consultation, but on the year one premiums on index annuities it can be as low as 3 percent and as high as 10 percent. And for life insurance, those rates can vary from 50 percent up to 110 percent!

So do insurance agents always act in the best interest of their client? Hopefully so, but that is not always the case, as they are trying to sell you on either life insurance or an annuity, and their paycheck depends on what you buy. Of course, they will try to help match you to the right product for your needs, but that doesn’t always guarantee that they are acting with your best financial future in mind.

Insurance agents are who you should be going to if you are looking to put your money into term life or an indexed annuity, but beyond that, they might not offer you much-unbiased help.

And of course, their pay being commission-based means that there is a conflict of interest between what you spend, and what they get paid. And for those who take an upfront commission, they have no reason to keep giving you advice once they are done making their dollar.

Second, it is similar to an insurance agent, and that’s an insurance company advisor. The main distinction between the two is that an insurance company advisor has more options as to what they can sell you, including variable annuities and mutual funds. Beyond that, all the downsides to working with an insurance company advisor are the same as working with an insurance agent and listed above.

The third type of advisor is the kind that can offer you one-stop shopping, meaning that they have all the training and licenses to give you all the advice you need, including insurance, securities, and investments. These type of advisors will get paid differently depending on what you need, sometimes in commission, and other times work for a flat fee. Commissions are generally collected when you buy insurance, mutual funds, annuities, and securities. The fee-based payment method often applies to things like asset management and can be as high as 2 percent of your total assets.

Will a one-stop shopping advisor have any conflicts of interest? Since commission is in play like with insurance agents, the answer to that is yes. Legally, he must always act in your best interests when it comes to asset management, but when it comes to insurance products, it can vary depending on your needs and the agent involved.

The final type of advisor is the kind that works for a fee-only, meaning no commissions, and his pay comes from you directly based on whatever criteria you need to use them for. A lot of fee-based advisors also sign a fiduciary oath, meaning they always must act in their clients best interest, which unlike the other options listed above, removes any conflicts of interest you might encounter working with them. They can help you manage your money in an ongoing manner, and be paid through a few different methods, depending on what you need them for, but the amount you owe should be known from the get-go.

In the end, only you can decide what type of advisor is going to help you get the financial security you need. Insurance agents are the best if you are looking to buy insurance, but if money management is your need, then looking into a fee-based advisor might make more sense. With this knowledge of how these people get paid, do your research for each individual advisor before going to them, and you should be fine.