By: Josh Slocum, McClellan Wealth Management
When you’re thinking about potentially protecting and securing your financial future, you want to make sure you’re making educated choices, especially when it comes to who’s actually handling your assets.
And one question that often arises is: How do financial advisors get paid?
This question should have a simple answer, right? Well, it may be a little more complicated than you think.
Fiduciary vs. Non-Fiduciary Advisors
Before we get into how financial advisors get paid, it’s important to differentiate fiduciary relationships from non-fiduciary ones. A fiduciary financial advisor is legally obligated to act in your best interest. They are strictly fee-based and don’t work on commission. In my opinion, these relationships are by nature more transparent than non-fiduciary ones, and there is less conflict of interest at stake.
Non-fiduciary advisors are not legally obligated to act in your best interest. This arrangement creates a conflict of interest, for example, they may recommend investments based on how much money it’s going to make them, even if it’s not going to benefit you. I believe non-fiduciaries are more likely to take advantage of the potential for extracting the highest payout for themselves instead of what will best serve you.
The Problem with Dual-Registered Advisors
If a financial advisor charges a fee, for all intents and purposes, it’s more likely a fiduciary-style relationship. But if they charge a commission, they’re aligning a buyer with a seller and charging a piece in between; that’s a non-fiduciary-style relationship.
The issue that comes up most often is with dual-registered financial advisors. You’ll find them at all the big firms, and the problem is that they act as fiduciary advisors and non-fiduciary advisors at the same time – and in my opinion, they’re not always up front about it.
You may ask a potential advisor if they’re a fiduciary, and the answer you might get is “Yes, sure I am.” That guy may be fiduciary in the sense that he’s charging a fee on one account – but in other accounts, he doesn’t act as a fiduciary. He may be making big commissions on investments that are more about his profit than your finances.
When this dual arrangement isn’t disclosed to the client, in my view, that opens the door for shady business.
The Importance of Transparency
When you’re choosing a financial advisor, I strongly believe that transparency is crucial. It’s more than just your money that’s at stake – your plans for the future and your family’s financial well-being are also on the line.
You may want to consider finding a fiduciary advisor who is very transparent and would rather lose business and do things the right way than make money by taking advantage of their clients.
Of course, the unscrupulous ones aren’t likely to share with you all the hidden fees and transactions that are motivated by self-interest. So you’ll have to do your own due diligence to make sure you’re choosing someone you can trust.
Screening a Potential Financial Advisor
To your benefit, a new rule was put in place this year by the SEC that states that both fiduciary and non-fiduciary advisors must provide form CRS to potential clients. This form was created so that prospects could more easily compare the different types of relationships and investment advice.
Even then, the most important thing to ask a potential financial advisor is: “Are you a fiduciary? Is this a strictly fee-only fiduciary firm?”
If they say yes, you want to get it documented. Having a fee breakdown in writing will give you recourse in case it turns out the advisor is not disclosing anything to you.
If they don’t want to give you this documentation, that’s a red flag.
A written document on the firm’s letterhead would have to be approved and signed by their compliance team, so there’s a lot of legality involved. The big firms may tell you to look in the fine print of all the hundreds of documents they’ve given you.
There’s a lot of money made in this business, and in my view, they want to make it confusing in order to cover themselves. That’s not in your best interest. If they claim to be fiduciary but deny you a written fee breakdown, it might be time to consider moving along and finding someone else.
It’s also important to note that just because an advisor is a fiduciary doesn’t automatically ensure they’re not crooks. No matter which type of advisor you use or how they get paid, it’s important to know your advisor and have trust in them, regardless of whether or not they’re a fiduciary.
You may also want to ask if they’re a CERTIFIED FINANCIAL PLANNERTM.
In my opinion, getting someone who is not a CERTIFIED FINANCIAL PLANNERTM to handle your money would be like getting someone who’s not a CPA to do your taxes – it just doesn’t make sense.
The bottom line is that it’s important to choose someone to manage your finances who’s driven by your best financial interests – not their own. And sometimes, this can ultimately come down to how they get paid and how transparent they are about it.
This material is provided as a courtesy and for educational purposes only. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.