Finding out how your prospective financial advisor is compensated may be the most important question you can ask. Advisors can be paid through a fee, like an annual planning fee or percentage of assets managed (AUM fee), commissions or some combination. Before you select an advisor to partner with you on your financial goals, you should be sure they are transparent with how they get paid so that you know what to expect throughout the engagement.
One of the most often misunderstood set of terms is the difference between fee-only and fee-based advisors.
A fee-only advisor is paid directly by their clients for advice, including investment management, plan implementation, financial planning, and the ongoing management of assets. Fee-only financial planners act as a fiduciary which means they are obligated to put their clients’ interests first. Registered Investment Advisors (RIAs) and Certified Financial Planners (CFP®s) are fiduciaries.
A fee-based may operate in a similar fashion as a fee-only advisor, but may also be paid via other sources, such as commissions from the sale of financial products clients purchase through them or their Broker/Dealer. These brokers and dealers are held to a lower legal standard which requires only that the products are determined to be ‘suitable’ for their clients. A fee-based advisor should disclose if they are acting as a fiduciary in all situations or as a fiduciary under certain circumstances only.
The SEC’s Regulation Best Interest (Reg BI) which was approved in June 2019 and fell under the Securities Exchange Act of 1934 establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts. As part of the rulemaking package, the SEC also adopted new rules and forms to require broker-dealers and investment advisers to provide a brief relationship summary, Form CRS, to retail investors. In addition, the SEC published interpretations concerning investment advisers’ standard of conduct under the Investment Advisers Act of 1940 and the “solely incidental” prong of the broker-dealer exclusion from the Advisers Act.
If your advisor is fee-based, search for their firm’s Form ADV filing with the U.S. Securities & Exchange Commission. The document includes information that spells out how brokers at the company are compensated. (It’s a good practice to check Form ADV before you hire any financial advisor. In addition to explaining fee structure, it lists past misconduct, conflicts of interest, etc. if there are any.)
The National Association of Personal Financial Advisors’ (NAPFA) position is that the fee-only method of compensation is the most transparent and objective method available. This model minimizes conflicts and ensures that your financial planner/advisor acts as a fiduciary. Fee-only planners are compensated directly by their clients for advice, plan implementation and for the ongoing management of assets. They may be paid hourly, as a retainer, as a percentage of assets (AUM), or as a flat fee, depending on your chosen planner.
At BerganKDV, our Wealth Management team is comprised of fee-only fiduciaries who are dedicated to helping you navigate all areas of your financial life. Want to learn more about what we can do for you? Let’s have a conversation!
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.