When you accept professional advice on how to invest, save, and grow your hard-earned money, you have certain expectations from your financial advisor: expertise, professionalism, ethics, and independent, sound financial advice. If you’re not working with a Fee-Only Financial Advisor, you may not be getting what you bargained for. Why?
According to the Bureau of Labor Statistics, in 2008 there were over 208,000 financial advisors in the United States, with that number expected to rise to 300,000 by 2018. However, of those, only 2,000 are Fee-Only financial advisors and members of the National Association of Personal Financial Advisors (NAPFA). Unlike transaction-based financial advisors who make their money on commissions earned from selling financial products, Fee-Only financial advisors do not sell any products, nor do they work on commissions. Instead, a Fee-Only financial advisor is paid a flat fee by the client for independent financial advisory services he or she provides, rather than from the investments the advisor recommends. Let’s break it down:
No Sales / No Commissions
Many financial advisors are “Commission-based” which means their income is directly linked to the financial products and investments they sell you. Make no mistake, they are selling; these individuals may call themselves financial advisors, but they are really just financial salespeople. Here’s why: It is more lucrative for these financial advisors to recommend certain investment products over others because of the commissions they earn. Therefore, it is very difficult for you, the client, to evaluate whether the “advisor’s” particular investment recommendation is most appropriate for your portfolio, or if it’s most financially lucrative for the advisor himself. By contrast, Fee-Only financial advisors do not sell any products nor earn commissions; their only source of income is from their clients. Therefore, clients understand that their Fee-Only Advisor works only for their clients’ best interest, and are not wed to any investment company, product, or even insurance company. As a result, advice is unbiased and independent, with no conflicts of interest – advisors are free to recommend investments and products that are in the best interest of the client rather than the company’s bottom line. It’s important to determine whom your financial advisor is really working for: you or the company whose products the advisor is “recommending”?
In recent years, the term Fee-Based was introduced by the large investment firms in response to the growing demand for Fee-Only financial advisors. Buyer beware: Fee-Based is not the same as Fee-Only. Fee-Based financial advisors can collect both fees and commissions, and they may also be incentivized to recommend certain products endorsed by their sponsoring firms.
A fiduciary is a financial professional who is held out in trust, and is legally obligated to put their clients’ interests above their own. Fee-Only financial advisors are the only financial advisors who operate under a fiduciary standard; transaction based financial advisors operate under what is known as a suitability standard, which is a much looser standard. In addition, Fee-Only financial advisors are highly regulated by either State or Federal regulators. If your financial advisor is unwilling to sign a fiduciary oath committing to put your interests above his/her own, then it’s time to look for a Fee-Only advisor who will.
Solutions Based vs. Product Based
A product-based approach is whereby a specific product is recommended or sold to the client, sometimes irrespective of the client’s particular financial circumstances and goals. Transaction, Commission, and Fee-Based advisors are typically trained on only the products they sell and/or recommend, thereby taking a product-based approach to their clients’ portfolios.
The problem with the product-based approach is that providing comprehensive financial advice should be a process with multiple steps, integrating the client’s holistic financial and non-financial reality. Fee-Only Financial Advisors always take a holistic approach with each client, and offer more objective advice on a plethora of investment options. As part of the holistic approach, Fee-Only financial advisors recognize that they can not work in financial silos, but rather in coordination with the client’s other professional advisors such as CPAs, attorneys, and estate planners. In this way, clients can rest assured that all actions taken related to their finances are commensurate with their overall needs and circumstances.
Moral of the Story
Always do research and ask a lot of questions before you enter into a professional relationship with a financial advisor. Whether you have $10,000 or $10 million to invest, your financial advisor should be paid only by you, commit to a fiduciary standard, and be free from any conflicts of interest. Fee-Only financial advisors fulfill all of these requirements.