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Is it best to work with an advisor who's independent or part of a large firm? I am not investment savvy and I'm entering retirement. I need to make sure I hire someone or a firm that is going to help and maybe is somehow insured.
-Sharon
That's a great question, Sharon. I'll provide some context that I think will help you as you look for an advisor, whether that person works for a large firm or a smaller independent practice. Although I am independent (which I and my clients specifically like), I don't think one is inherently better than the other.
It's more about the firm's culture, the individual advisor, the services they offer as well as your preferences as the client. Ultimately you may be comfortable with one over the other and that's perfectly OK. It's your money and you should be happy with where you keep it. (And if you need help finding a financial advisor, this tool can help match you with one.)
Is the Firm Insured?
You specifically brought up insurance. The way you phrase the question makes me think it may be worthwhile to explain how firms might be insured. The two most common types of insurance that you might want to know about are SIPC and E&O.
SIPC Insurance
The Securities Investor Insurance Corporation, or SIPC, provides a similar type of insurance to brokerage firms that FDIC does to banks. SIPC insurance protects you in the case of the brokerage firm fails. Notably, it does not protect you from the risk of market loss.
SIPC normally covers accounts at both large and small independent firms. This is something you can ask and is easily verified.
Errors and Omissions Insurance
This is professional liability insurance. It protects the firm and advisor in the event a mistake or omission on their end causes harm to a client and the client takes legal action against them. It helps ensure they can actually pay you any judgments that may arise.
Again, large and small firms alike often have E&O insurance and it's perfectly OK to ask about it. (And if you'd like to hire a financial advisor but don't know where to start, consider matching with one here.)
What Is a Custodian?
You may not be aware, but most independent firms utilize larger institutions' infrastructure for accounts and investments through custodial agreements.
In the investment world, a custodian is an institution that handles client accounts and securities. Independent advisors that work with individuals rarely take possession (custody) of client funds themselves, but instead use an established firm for backend logistics. Some of them are household names like Charles Schwab, Fidelity or TD Ameritrade (which is owned by Charles Schwab). Others, like Altruist, SEI and TradePMR exclusively serve independent advisors and don't have a public-facing retail division so you may not have heard of them. (This tool can help match you with an advisor who might meet your needs.)
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