Why is fee-only compensation for your financial advisor the best option?
Contrary to popular belief, most advisors are NOT required to act in the best interests of their clients! In fact, the compensation structure for a financial advisor can play a significant role in determining his or her objectivity.
When selecting a financial advisor, investors have three basic models from which to choose:
Commission-only advisors (i.e., stockbrokers) are paid only when they make a sale. Any actual financial advice that they give is incidental to the sale of the product. Commission-only advisors are held to the suitable standard, which means the products they recommend must simply be generally reasonable for the client and situation. They are not required to disclose the amounts of their commissions to their clients, nor are they required to disclose conflicts of interest that may influence a client’s ultimate decisions.
This means commission only advisors can sell products that may be best for them, not for you.
Fee-based advisors receive commissions, but they may also be paid by the client for the advice they offer. Typically, such advisors manage investments on a fee-only basis, but they also sell other commissionable products such as life insurance or variable annuities. Similar to commission-only advisors, they are not required to disclose the amounts of their commissions to their clients.
Fee-only advisors are held to a fiduciary standard, which is the highest standard of care–and trust–in either equity or the law. Their responsibility is to serve their clients to the best of their ability. This means they are required to put their clients’ interests ahead of their own and to openly disclose any conflicts of interests they may have when making investment recommendations to their clients.
A fee only advisor’s compensation comes directly from the client, not from sales commissions, undisclosed fees, or third party agreements. As a result, you can be confident that the advice you receive is based entirely on your needs and objectives.
Only under a fee-only method of compensation are the incentives of an advisor and client truly aligned to protect and grow your wealth.