We often hear the term “Independent Financial Advisor” in the industry, both as clients or people within the industry. It seems like every advisor out there is touting themselves as someone who’s truly independent, and looking out for their client’s best interest, but clients really need to ask – is their advisor truly independent?
If we take a step back and look at the connotation of being ‘independent’ in the Financial Services world, it always goes back to: not being influenced or controlled, not being affiliated with any one product/service company, or being free of any bias or restrictions on the products/services the advisor is able to sell.
Based off of this description or assumption, that would essentially eliminate the vast majority of Financial Advisors in the industry from the “independent” landscape. The reality is, the vast majority of Financial Advisors in the industry are in some way, shape, or form, associated or affiliated with a certain product/service company on either the investment or insurance side.
According to Advocis, there were over 90,000 Financial Advisors in Canada in 2011, and if you look at the breakdown, even those who were put into the ‘independent’ category, aren’t really independent at all. As a client – and we are all clients – when we hear that someone is an Independent Financial Advisor, the automatic assumption is that the advisor has access to all products/services from all companies, and is truly giving us the best of, or the cheapest of, what’s available, based on our needs. This, however, is not the case for the majority of Financial Advisors in the industry.
If we even just look at the most well-known non-bank Financial Advising companies, and there are maybe 5 or 6 of them, none of these companies are truly independent. They are either owned/operated by an insurance or investment company, or are in one way or another, associated with one. This means that their advisors are either influenced or forced to push their own product, which essentially eliminates them from the ‘independent’ category. There are a couple of these companies who are able to offer products of other insurance/investment companies, but in those cases the advisor usually gets paid less for those sales, are only able to do so in certain circumstances, or the availability of other products/services is still limited.
There are 20+ insurance providers (varies depending on each province/territory) and over 400 mutual fund companies in Canada. Now, this doesn’t mean that Advisors should be using every single one, but this should illustrate that there ARE options out there. In reality, most true Independent Financial Advisors will generally have 80%+ of their business with 3-5 companies, on each side (investment and insurance). However, there are situations where they would go outside the realm of their usual selections based on certain situations – for example, senior clients, corporate clients, clients with previous health issues, etc… The fact that the advisor is able to do that is something that should not be taken lightly. There is tremendous amount of value in Financial Advisors being able to shop around for the client to find the best of, or the cheapest of, what the client needs or wants. I have seen many times that Advisors will use a company outside of their most used companies, due to a certain client situation. It could be health issues that one company was more lenient on, the clients age, or simply because the client has had some past experience with a certain company and they do/don’t want to associate with them again.
We know that there is no ‘one size fits all’ solution in any industry, and this is even more the case in the Financial Services industry, where there are countless different insurance and investment options, ranging from life, critical illness and disability protection on the insurance side, to mutual funds, segregated funds, or separately managed accounts on the investment side. It is also fact that there is no one company that is the best/cheapest in each category of products, so where is the value in being restricted to only 1 or 2 companies? Generally speaking, a company (whether insurance or investment) can only focus on 2 or 3 areas of its business where it wants to be very strong, which means there are 2 or 3 other areas that it’s not very strong, or, doesn’t deal in at all, so having a Financial Advisor that has access to all the products/services, is definitely something that a client should have.
When dealing with a Financial Advisor, it is important to make sure you understand what the availability or limitations of that advisor are. You want to ask questions like:
- Are they only Securities Licenced, Insurance Licenced, or both?
- Does the company they work with have a parent company? If so, who are they? Is that parent company an insurance/investment company?
- How many different product providers do they have access to?
- How are the fees calculated for the products they sell?
- How do they get compensated on the products they sell?
- What would happen to your plan or relationship with that Advisor if they were to leave that company and go to another?
It’s also always important to ask your Financial Advisor to provide you with multiple options on each type of product/service they recommend. It’s good to have some comparisons between the different products/services and companies to show what the pros and cons are on each side. If they come in and try to sell you on only one product or one company, that often is a ‘yellow flag’ to state that they are not truly independent, or that they have certain motives. At the end of the day, you as a client need to make sure you’re getting full Value out of the hard earned money that you are putting into your Financial Plan. Being Financially Independent is definitely easier when you have a Financial Advisor that is truly Independent.
Most importantly, it’s always recommended that you do your own homework as well. In today’s technology age, there is a plethora of information on each topic, product, service, or strategy, all at your fingertips. Informed individuals are ones that will have much more success and will make the best decisions for themselves.
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