Financial advisors typically earn an income by charging fees or by earning commissions on the investments they sell.
There are several income-generating combinations a financial advisor can choose from to earn his or her living:
- commission-based
- fee-based (fees plus commissions)
- fee-only
Here are 5 reasons why that last option, the fee-only advisor, is a good choice.
1. He or she will have fewer conflicts of interest.
When advisors are tied to certain transactions from which they earn commission, they may be more likely to seek out clients who fit the bill for those transactions.
If you don't fit that profile, then that advisor won't likely view your business as having much potential for him or her. It's hard to feel like you're both on the same team with this sort of setup.
2. His head and his heart will always be in alignment.
Let's assume you've chosen a financial advisor who maintains a fiduciary oath. That means he (or she) is bound by professional codes of conduct to act in the client's best interest. In other words, he wants the best for your finances- that's where his heart lies.
When his income is commission based, he may want to do the best by you, his client, but his head will steer him towards those products from which he stands to earn him a commission if he sells them. That's where his head may lie.
Fee-only financial advisors, on the other hand, are able to act in complete accordance with their fiduciary oath to always steer you in the best possible direction with your finances.
3. It's hard to override human nature.
While it's probably true that most commission-based advisors are sincere professionals trying to do right by their clients, they might not even realize they could be doing otherwise.
Without knowing it, they could sub-consciously be corralling their clients into the investment pen where their own commissioned products are kept. Given the choice between two similar investment products, a commission-based advisor will most likely choose the one which gives him or her a commission, whether he's consciously trying to do so or not. We're wired to survive, after all, and when survival is tied to commission, that's just how the cookie crumbles.
4. Only fee-based advisors belong to the NAPFA.
The National Association of Personal Financial Advisors (NAPFA) was created in 1983 to provide consumers with a body of financial advisors who are upheld to the highest standards and who are distinguished by their expertise.
Membership in NAPFA is strictly for fee-only advisors who also meet professional competency standards and who are client-focused. Choosing your advisor from the membership ranks of NAPFA doesn't guarantee you'll get the best advice, but it does increase the chances you'll find a professional who puts your best interests first.
Plus, NAPFA membership can in some ways exceed the requirements needed to become a Certified Financial Planner. We've already mentioned the fiduciary oath. NAPFA members must abide by this oath.
Advisors who don't hold themselves to a fiduciary standard are only required to find "suitable" products for you, but those aren't always the ideal products. As long as they're not harming your finances, they're acting within bounds.
5. You won't be left wondering if you really got the best advice.
Finally, you won't be wondering, on your next sleepless night, whether you invested your money the right way if you went with a fee-only advisor. Since they get paid no matter what you do with your money, you're more likely to feel as if you're getting sound advice.
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PJ Wallin is the founder of Atlas Financial, a fee – only financial planning, investment management, and tax services firm located in Richmond, Virginia. Atlas uses an all – inclusive approach provides a clear overview of your financial potential and gives you the comprehensive support necessary for peak success. PJ and I became friends after meeting through the XY Planning Network, and I asked him to write some thoughts on choosing a Fee – Only advisor as a guest topic for this site. |
PJ Wallin | Atlas Financial