From a traditional stockbroker to an insurance salesperson, there are an endless number of so-called “financial advisors” out there. It’s important for you to understand the differences between the types of advisors competing for your attention and business. You can start by asking the following questions of your current or potential advisor:
1) How are you compensated?
2) What conflicts of interest exist in our relationship?
3) Are you held to a fiduciary standard at all times, or just when offering advice?
4) What credentials do you hold?
As we mentioned above, financial advisors come in many forms, but they tend to fall into two categories: “fee-only” and “fee-based.” While their names are similar, there are several important distinctions between the two business models.
- compensated only by their annual management fee, which is typically a percentage of the assets managed
- does not participate in commissions or transaction fees, revenue sharing, referral fees, or other compensation schemes
- held to a fiduciary standard of care; required to always act in your best interests
- compensated by commissions, sales charges (loads), fees based on assets under management, revenue sharing, referral fees, and interest on loans
- may be held to a fiduciary standard when offering advice, but not when recommending or selling you investment products
- often paid by the products they recommend for your account
A conflict of interest exists whenever your interests and those of your advisor aren’t aligned. When an advisor earns commissions, there is an incentive for them to use products that pay higher commissions. We eliminate this conflict because we do not sell any products nor do we get paid by commissions or transaction charges. Read our “Statement of Fiduciary Responsibility” to you.
Using no-load and no transaction fee mutual funds, $4.95 stock trading commissions, and being cognizant of fund expense ratios allows P&A to save our clients money. By minimizing the fees to your account, we increase the performance we deliver to you. Since we are paid a percentage of the assets we manage for you, our fee income actually increases if we can save you money in this manner.
We have access to thousands of no-load, no transaction fee funds as well as many institutional-level funds and investments. If you’re looking for an advisor who clearly explains how they’re compensated, offers unbiased financial advice, and who always works in your best interests, then a fee-only advisor like Pittenger & Anderson would be a good fit for you.
The CFP® certification is the highest distinction in the financial planning industry. The certification process includes five exams and a comprehensive final. Individual modules cover the Financial Planning Process, Insurance, Investments, Taxes, Retirement Planning and Estate Planning. Those individuals who have been authorized to use the CFP® certification marks in the U.S. have met rigorous professional standards and have agreed to adhere to the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence when dealing with clients.
The CFP Board has issued a document entitled “Consumer Guide to Financial Self-Defense.” The paper lists 10 “red flags” to look out for when dealing with financial advisors. We suggest giving it a read.
To check the disciplinary history of any CFP®, go to the CFP® Board of Standards website. To check the disciplinary history of a stockbroker or fee-based advisor, go to the FINRA Broker Check website.
For further reading, check out the following articles:
To see the impact of paying higher fees over a period of time, check out Why Fees Matter.
For more questions to ask a potential financial advisor, see our Frequently Asked Questions page.
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