With the number of “financial advisors” growing every day, how do you know who you can trust
with your money? Many financial advisors are nothing more than glorified salespeople with a
nifty title. The investments they sell have a direct correlation with the compensation they
receive. Given those dynamics, what are the odds that you will receive objective advice? Don’t
be a victim. The following guide will help you make more informed decisions on how advisors
are compensated.
Stockbrokers
Commission based advice is great---if you’re a broker or brokerage firm. For the investor,
however, it’s a death wish. This type of advice is plagued with high costs and opaque
disclosure—high costs that chip away at your profits. The registered representative
(stockbroker) - unlike a registered investment adviser - has no fiduciary duty to place the client’
s interests first. Inadequate disclosure coupled with conflicts of interest guarantees that a fair
number of people are going to be victimized by bad advice.
Fee-Based Advisors
“Fee based” advisors (also referred to as fee-offset) can be just as bad, if not worse.
Commission based compensation includes “fee-based” compensation which is a particularly evil
label referring to both fees and commissions. Fee based advisors have the ability to charge a
percentage “based” on the assets they manage, but they also have the ability to sell you a
commission based product (like an annuity, a load fund or life insurance). “Double dipping”, as
it’s known in the industry, while not illegal is certainly immoral. Don’t be fooled. Stay away from
advisors peddling investments that charge you front end or back end loads or surrender
charges.
Fee-Only Advisors
Fee-only compensation (not to be confused with fee-based) is non commission driven and
eliminates the exploitation of investors, where quality objective financial advice is the only
product, and the advisor sits on the same side of the table with the client. The only way the
advisor can make more money on your relationship, is to make more money for you.
Most credible fee-only advisors assume a fiduciary role in the investment management process,
putting the client’s interest ahead of their own. This includes finding the best investment
alternatives with the lowest internal expenses, and one of the best ways of enhancing returns is
to control portfolio costs.
High net worth, high income households are often easy targets for bad advice. When hiring an
advisor, a considerable amount of thought and research should be dedicated to the process.
After all, it’s only your money. Here are some things you should ask when engaging a financial
professional:
• How are you paid?
• Are your recommendations in any way influenced by compensation?
• What is your investment philosophy?
• Do you provide an Investment Policy Statement? (If you don’t know what that is—find
out!)
• How much authority will you exert over my accounts?
• Do you have a clean regulatory record?
• What are your credentials?
• What is your educational background?
• How much experience do you have?
• What are your continuing education requirements?
Finally, you should also request and review the advisor’s written disclosure statement, ADV part
I and II.
Resources
The Certified Financial Planner™ Board of Standards offers some great (free) online guides on
how to choose a planner. Check out their site at: http://www.cfp.net/learn/library.asp.
If you are looking for a fee-only advisor (in my humble opinion-it’s the only way to go) the
National Association of Personal Financial Advisors (NAPFA) is an excellent resource, check
them out at: http://napfa.org/.
In your quest for an advisor, as with anything else, the more informed you become the better
your outcome should be.
Not All Financial Advisors are Created Equal
by Cathy Pareto, MBA, CFP®, AIF®
by Cathy Pareto, MBA, CFP®, AIF®
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