Dental practice owners might be easily misled by the titles of people working in the financial business. Here's what they should look for when it comes to selecting someone to guide their finances.
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With the Department of Labor (DOL) rule in the spotlight, this is a great time to discuss how to choose an investment advisor / financial advisor / financial consultant.(1) The financial world is filled with jargon and professional titles that can be confusing and misleading to those who aren't in the business. It is nothing like the dental industry, where people must go through rigorous education to obtain the ability to practice dentistry.
For example, an insurance agent might hand out business cards with the title “financial advisor” or “financial consultant.” This can be misleading since most insurance agents are only allowed to "sell" insurance products. But since insurance products include annuities where IRA rollovers are allowed, some hold themselves out as financial or investment professionals. Is there anything wrong with insurance agents? No! They have their level of expertise in risk management. However, if you want investment advice, an insurance agent may not have the skill of an investment advisor, who must pass industry standardized exams.
Unless you’re in the financial industry, it’s difficult to distinguish an insurance financial advisor from an investment financial advisor. Some financial advisors only specialize in 401k plans, others in estate planning. The list goes on. So, how do you choose? First, you must know what you’re looking for. Are you looking for insurance, 401k information, estate planning, or investment advice? Once you identify your needs, you can seek out a professional in that area. When you’re interviewing your potential advisor, it’s perfectly fine to ask about his or her field of expertise.
Let me give you an example. Say I’m an investor looking for an investment professional to help me manage my portfolio. I meet with an investment professional who specializes in portfolio management. If I’m looking for someone to actively manage my portfolio and I fail to ask this professional what type of portfolio management he specializes in, I could end up with an indexed passive investment portfolio when I wanted an active portfolio manager. It’s important to understand your needs and not rely on someone else to tell you about your needs.
The DOL fiduciary rule brings to light the role of a fiduciary. Dental professionals are all too familiar with the role they play as fiduciaries to their patients. In the investment and financial advisory world, it is not so clear cut. Most brokers or financial salesmen don’t have to hold themselves to a fiduciary standard, only a suitability standard. There’s a huge difference. Fiduciaries in the investment world must put their clients’ interest ahead of their own. The easiest way to find out if your financial advisor is a fiduciary is to ask. Another way is to look at how someone is compensated. If they are a fee-only advisor, they are a fiduciary. If on the other hand they earn commissions, they’re likely held only to a suitability standard. This means they do not have to put your interests ahead of their own if whatever they’re selling is suitable for you. The fiduciary standard is stricter and helps ensure that your interests come first. The DOL fiduciary rule is attempting to correct this issue in the financial markets. However, until it does or even if it does not, you should always ask.
In summary, it is important for you to know your needs. Don’t let someone tell you what you need. This may take a little research on your part, but it will be well worth it. Even if your trusted advisor is a fiduciary, he or she may not meet your needs. Unless you tell the person your true needs, you may not be happy with the result. Finally, if you know your needs, it is better, in my opinion, to seek out advice from a fiduciary. They have a duty to guide you based on your needs.
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