The most important question you can ask when hiring a financial advisor is, “How are you paid?”
From day one, we at New Perspectives committed to being a fee-only advisor. That commitment has resulted in clients who trust that our advice, as fiduciaries, is centered on their needs and not our bottom line. Our client is the ONLY one who pays us which ensures that their interests align with ours.
In the financial industry, there are 3 models of payment for advice:
With the commission model, compensation varies depending on the product/investment recommended. Lucrative (for the salesperson) commission-rich products such as annuities and insurance products may not be in the best interest of the client. While commission brokers are required to disclose that compensation, it is often buried in a prospectus or some other fine-print contract. Most clients do not know what they are paying. In some cases, payment comes off the top. In other cases, it comes in smaller, annual increments that impose penalties on clients who move their funds before full payment has occurred.
Your “advisor” is being paid by someone else to do something that may not exactly be in your best interest. Commission brokers typically are NOT fiduciaries. They are held to a different standard called suitability. That means they only need to show the recommended product is suitable, even though it might not be the best product in that situation. It is a system rife with conflicts of interest.
The fee-only model is clear. Clients are required to sign a contract with costs detailed. In this case, clients may pay an hourly fee or they may pay based on a percentage of their assets that the advisor manages. Mainly, we charge a management fee of 1% of assets managed, but we still conduct some consultations under the hourly arrangement. The percentage of assets model aligns our interests with those of our clients. When our clients’ portfolios increase, our compensation increases.
Expect fee-only advisors to be Registered Investment Advisors operating as fiduciaries. This is the highest standard in the business and requires these advisors to put their clients needs above their own.
The fee-based model is a hybrid one, further clouding the picture of compensation. These advisors charge a fee for their advice, but they also recommend commission products. As long as these advisors steer clear of commission products in accounts where they also charge fees, they are operating like fee-only advisors. In some cases, they may offer commission products to a set of clients who are not under a management arrangement.
For any client, the ultimate goal is to find an advisor who adds value to your financial situation. That means getting sound advice that isn’t weighed down or tainted by hidden fees. That means having an advisor with expertise in all areas of the financial picture—investments, tax policy, estate issues. It also means having someone you can trust to put your needs first. For us at New Perspectives, the fee-only arrangement fits our values and our belief that giving our clients the best advice makes for good long-term relationships.
So ask the question, and understand how your advisor is being paid. No one should ever pay the price for bad advice.