When it comes to financial advisors, investors want them to be honest and trustworthy. When the advisor is effectively working for himself and not for a large financial provider, their honesty and trustworthiness is perhaps easier to judge.
Generally, Independent Financial Planners work with investors to create comprehensive financial strategies, without the corporate pressures to represent the interests of the firm they work for. Likewise, they are not tied to one or two product providers, allowing them to come up with a program that fits the investor more than it fits the advisor’s interests.
Independent Financial Planners are popular. According to Spectrem’s recent research entitled Profiling of Investors Based On Their Preferred Advisors Types. IFPs are the second-most popular type of advisor, behind Full Service Brokers. In a survey of more than 6,600 households, 24 percent use an Independent Financial Planner compared to 36 percent using a Full Service Broker. Next on the list of seven types of advisors in the Spectrem study was Investment Managers with just 12 percent.
“The appeal of Independent Financial Planners appears to be the straightforward nature of the relationship,’’ said Spectrem president George H. Walper Jr. “Investors who use IFPs are not looking necessarily for complicated financial strategies. They have a high level of trust in their advisor that they are getting the best product or service they can for the fee they are paying without any outside pressure affecting the choices given to them by their advisor. They feel they are getting a more holistic approach to their financial situation.”
For the purposes of the study, investors were given this description of Independent Financial Planners:
“This person is not affiliated with any large financial provider. He or she delivers objective, comprehensive advice around retirement planning, estate planning, tax strategies, cash flow and investments. Financial planners typically charge a flat fee for their planning advice, or a percentage of assets under management if they actually manage investments for the client.”
“Independent’’ is a word that still holds sway in America. When an advisor represents themselves as “independent”, it is a signal to investors that they are less likely to be driven to offer selections chosen for them by someone “upstairs”.
That factor is reflected in the question asked in the Spectrem study about trust. Asked to place their level of trust in their advisor on a 0-to-100 scale, investors using IFPs averaged a rating of 87.55, higher than the average rating of any other type of advisor, including the more popular Full Service Broker.
Satisfaction rates for investors using Independent Financial Planners pare also among the highest of all investors. The same can be said for their loyalty to the advisor, according to the study.
However, the investor using an IFP has a lower level of risk, on average, than investors using other types of advisors. More than 50 percent said they preferred a guaranteed rate of return for the majority of their investments rather than the choice of putting a portion of their investments at significant risk for a higher rate of return.
An advisor hoping to persuade an investor to move from an IFP would need to demonstrate the willingness to accept the investor’s need for safety over risk and reward.
Going along with the desire for a guaranteed return, investors using IFPs do not spend much time with their investment plans, perhaps using their advisor for more of a secure, long-term outlook. Only 31 percent of the investors who prefer using an IFP said they like to be involved in the day-to-day operations of investing, and only 32 percent say they enjoy the act of investing, both the lowest percentage of all investors in the study.
Top Takeaways for Advisors
-From time to time, investors change their attitudes towards risk. If an advisor meets with an investor who is currently working with an IFP, question whether the safety of the investor’s choices is actually reducing his or her opportunities to increase their portfolio value.
-Many types of advisors currently provide financial planning services. The key is to provide these services in a manner that provides answers that are suitable for the client and does not appear to promote only the products and services of the advisor. We’ve all been offered the “financial plan” that only tries to sell insurance. This is no longer acceptable for most investors.
-Advisors should regularly conduct client satisfaction surveys with their clients. Generally, the surveys turn out to be a positive experience for both. This will allow you to identify any challenges as well as opportunities for new products and services.
*According to Spectrem research, there are currently 29.8 million households with $100,000 - $1 million in net worth (not including primary residence, NIPR). There are 9.1 Millionaire households ($1 million - $5 million net worth, NIPR), 1.21 million Ultra High Net Worth households ($5 million - $25 million net worth, NIPR) and 145,000 households with more than $25 million in net worth, NIPR.