This is Part 2 of my series on Financial Advisors. Part 1 covered the license designations an FA can and should have. Today we’re going to talk about how FAs get paid.
If you have an FA and you don’t know where every cent of your FA’s pay is coming from, then you have a problem (that you probably don’t even realize!) In fact, I doubt you are working with a fee-only FA. Fee-only and fee-based sound almost identical – and the industry is counting on you not to know the difference!
Fee-based FAs can be compensated by the client (you) but also by commissions from selling insurance products and/or loaded funds and/or referral kickbacks for referring you to another professional such as an insurance agent, etc.
Obviously, fee-based financial advisors are typically motivated to make recommendations that make them more money. Common sense, right? In other words, fee-based FAs are not held to a fiduciary standard.
So, what is the fiduciary standard? It’s like the Hippocratic Oath for FAs: an oath that they (the FA) will put your interests ahead of theirs. By being a fiduciary they must disclose to you any potential conflict(s) of interest and be transparent about how they are paid.
In contrast, fee-only FAs, are paid by only you, the client. A fee-only FA cannot get paid by selling you insurance products or loaded mutual funds. These FAs are true “fiduciary” advisors. Fee-only FAs should always be willing to sign an agreement stating they are a fiduciary and will always act as a fiduciary in any financial transactions with you.
A good way to ensure a potential FA is fee-only is to see if they are a member of NAPFA, the National Association of Personal Financial Advisors. NAPFA is the most recognized national organization of true fee-only FAs.
To qualify for NAPFA membership, the applicant must submit a financial plan for review, take an oath to be a fiduciary in all client relationships, and comply with annual continuing education requirements.
Not all true fee-only advisors are NAPFA members, but all NAPFA members are true fee-only advisors. If you are vetting an advisor who is not a member of NAPFA, simply ask your prospective advisor to just sign a fiduciary agreement. NAPFA has a template on their website that you can use. Remember, no one will care more about your money than you.
Next in Part 3, we’ll go over what real FAs do.
Do you know how your Financial Advisor is paid? Comment below.