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Financial Planners Diversify: Four Types

Brokers, registered investment advisers, fee-only, commission-based, dual license – the labels for financial planners can be intimidating.

In a consumer-friendly article, the Retirement Income Journal (RIA) in November identified four adviser types, based on what they do for their clients.

Most advisers still fall into the traditional Technician category. But the rise of other types – Strategist, Behaviorist, and Life Coach – partly reflects a profession rocked by the 2008 financial crisis. The number of advisers nationwide fell 3 percent last year, according to Cerulli Associates in Boston.

“[T]he combined impact of the financial crisis, boomer retirement, the advent of behavioral economics and fee compression is forcing more advisers to evolve,” RIA explained.

The following is an adaptation of RIA’s article, which was based on a presentation to the University of Pennsylvania’s Wharton School of business by fee-only advisers Paula Hogan in Milwaukee and Rick Miller in Boston.

The new year is around the corner, and perhaps you’ll want to hire a planner. But which of the following four types suits you?

Strategist

  • Hedge or insure portfolio strategies to smooth income over client’s lifetime.
  • Tailor risk of financial portfolio to take into account client’s human capital, in addition to risk tolerance and goals.
  • Match assets and liabilities and use inflation-protected financial products.
  • Fund client’s aspirational life goals with riskier investments.
  • Clarify goals that are contingent on accumulating sufficient wealth.

Behaviorist

  • Establish portfolio guarantees that address client’s level of aversion to losing money.
  • Sort through client’s biases to set up annuities with downside protections, paired with some upside potential.
  • Address client’s denial or implausible expectations about aging.
  • Engage client in discussion about his or her values.
  • Ask questions like, “Are you sure there isn’t enough money for your well-being?”

Life Coach

  • Act as counselor, information resource, technical expert, cheerleader, accountability figure and healer.
  • Spend time at outset agreeing on the type of adviser client needs and his or her preconceptions about risk and return.
  • Ask client questions like, “What do you care about and value?” “What are your money values?”
  • Examine how to adjust saving, spending, working, and risk taking to levels the client desires.
  • Develop a plan of action that can be taken in small steps.

Technician:

  • Focus on building large portfolio using saving and investment diversification.
  • Tailor client’s financial risk to risk tolerance.
  • Impart belief in the safety of stocks over the long term.
  • Design sustainable withdrawal program for retirees, typically 4% of assets per year and adjusted for inflation.
  • Suggest long-term care insurance to complement investments.

One traditional dividing line for advisers remains: fees versus commissions. Fee-only advisers charge for services, while commission-based ones earn a commission by selling financial products such as mutual funds to their clients.

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