There is considerable confusion in the investment community regarding financial advice and the people who dispense it. The truth is a very small minority of investors know and understand how their financial advisor is paid. Understanding this difference is critical to you choosing the right advisor for you.
What you need to know:
Investment advice is not free. Advisors are compensated in different ways, fee-only, fee-based and commission. Regardless of the type of advisor you choose, there is a cost for the advice you receive.
What is a “Fee-only” advisor?
Fee-Only refers to how an advisor is compensated. Fee-Only advisors are Registered Investment Advisors and are regulated by their state Securities Board or Securities and Exchange Commission.
- Are Independent – They work solely for you, the client. They are not affiliated with any bank, brokerage firm, or insurance company. They can go anywhere in the financial arena to find the solution that works best for you. They are not held captive to any company products.
- Do Not Sell Investment Products – they provide advice only. All conflicts of interest regarding compensation from product sales are removed.
Advisors that sell products are paid by commissions from products sold. This creates a built in conflict of interest. Whose needs come first? Who are they really working for? They may feel pressure to sell products by their brokerage firm while at the same time trying to represent their client’s interest.
- Must Disclose all Fees up front – this means there are no hidden costs. You know exactly what you are paying for the services you receive. Determining fees paid to advisors selling financial products can be a little harder to discern.
- Are Fiduciaries – they are held to a higher standard of client care. They must put your interest first at all times, abide by a code of ethics, and disclose all conflicts of interest and fees.
Advisors that sell products are held only to a suitability standard which is a different level of care.
What we believe:
While there is nothing wrong with selling financial products, seeking advice from someone trying to sell you a product may not result in advice that is solely in your best interest.
That’s why we believe those that provide investment advice should be fee-only independent advisors.