There is an inherent conflict of interest embedded in the investing and financial planning industry. There are two ways for people who help you buy and sell stocks and investments get paid, and you need to be aware of them in order to succeed and watch your interests. Those advisors can be paid either through a commission or fee type payment structure or a combination of the two. If your financial planner charges you a fee, 1% of your investments with them for example, it does not matter how many times they trade stocks within your investment account on your behalf. Their goal is to increase the balance of your portfolio because that is the only way that they will make more money from you.
A commissioned based stockbroker or other advisor like that earns his or her money by selling you a financial product. You are recommended to purchase certain mutual funds, shares of stock, or other investment and insurance products. Every time you do so, your broker will earn a commission like a used car salesman on that sale or trade. In order to earn more money, the broker will need to get you to buy or trade more and more financial products or investments in your account generating a charge for them each time.
Fee-only financial advisors provide advice and/or ongoing management of your investments. Most are not registered representatives of any financial services company such as Ameriprise, AIG, Wachovia, UBS, Merrill Lynch, and many other large firms. Those types of advisors have a base fee and commission business model where they charge a flat fee for an initial financial plan and then earn commissions on the products that are sold to the customer as part of the plan. Fee-only financial advisors are typically self-employed Registered Investment Advisors (RIA) or employees of this type of financial planning firm. All of their compensation is paid directly by the client.
The Biggest Advantage. Fee-only financial advisors have no financial stake in the recommendations they provide for their clients. They recommend only the financial products and investments that they believe are in their customer’s best interest. This compensation method does remove many inherent conflicts of interest regarding how the advisor is paid.
Fiduciary Standard. Federal law requires that Registered Investment Advisors be held to a Fiduciary Standard which requires that an advisor act only in the best interest of his or her client. The fiduciary standard includes finding the best investment alternatives with the lowest expenses. These investment advisors must disclose any conflict or potential conflict to their client prior to developing a relationship. Investment advisors must also abide by a code of ethics and fully disclose how they are compensated. This is one of the reasons that Dave Ramsey does not recommend fee-only advisors as part of his endorsed local provider’s network.
There are several resources on the internet that can help you find the best advisor, broker, or planner to match your needs. The Garrett Planning Network is a great place to start to find a fee-only financial planner. You can find one in your area through their locate an advisor page. The National Association of Personal Financial Advisors (NAPFA) is also a good resource. And, can use the PlannerSearch tool of the Financial Planning Association to help you find a financial planner that meets your needs and criteria. But, do not forget. The person who cares the most about your money and your financial future is you.