Do you know how your financial adviser is compensated for the advice he or she gives you for your financial life? It’s a fair and important question, because how a financial adviser is compensated may make a difference in the advice you receive.
Types of Compensation
Of course you’re aware that financial professionals get paid for what they do – no one gives advice for free, unless they’re your uncle. Understanding how different types of advisers get paid can help you to choose the adviser who best fits with your financial goals.
In the National Association of Personal Financial Advisors’ (NAPFA’s) consumer guide, “Pursuit of a Financial Adviser,” you will find clear definitions of the models of compensation common to the financial advising industry. These definitions clearly spell out the differences among the types of compensation:
- Fee-Only Compensation – This model minimizes conflicts of interest. It is the required form of compensation for members of NAPFA. A Fee-Only financial adviser charges the client directly for his or her advice and/or ongoing management. No other financial reward is provided by any institution—which means that the adviser does not receive commissions on the actions they take on the clients’ behalf. Compensation is based on an hourly rate, a percent of assets managed, a flat fee, or a retainer.
- Fee-Based Compensation (fee and commission) – This form is often confused with Fee-Only, but it’s not the same. Fee-based advisers charge clients a fee for the advice delivered, but they also sometimes receive payments for products they sell or recommend. In some cases, commissions are credited towards the fee, giving the appearance of a lower-priced option, but any outside compensation creates an inherent conflict of interest which could lessen the adviser’s ability to keep the client’s best interests first and foremost.
- Commissions – NAPFA has always maintained that an adviser who is compensated through commissions is primarily a salesperson. A client working with a commissioned sales person must always ask himself: Is this advice truly in my best interest, or is it the most profitable product for the adviser?
Why You Should Choose a Fee-Only Financial Adviser
A fee-only financial adviser is a Registered Investment Advisor (RIA) with a fiduciary obligation to act in a client’s best interest. He or she does not sell product or receive compensation from a third party in exchange for referral of business. A fee-only adviser will give you advice tailored to your personal financial situation, without any influence from outside interests.
The National Association of Personal Financial Advisors (NAPFA) is the country’s leading professional association of fee-only financial advisers. Members of NAPFA are held to an oath, which they must sign each year, that clearly states they will not receive a fee or other compensation from another party based on the referral of a client or client’s business.
When you’re in the process of selecting a financial adviser, you should be very interested in learning how the candidates on your list are compensated for their advice. Beginning your list of questions with, “How is your firm compensated and how is your compensation calculated?” can help you to decide which adviser is the best fit for your financial situation. NAPFA’s consumer guide also lists a number of other questions that you’ll want to ask in order to get an accurate picture of the adviser firms you are considering for your financial life.
The best part of working with a fee-only adviser is that they are held to a standard that obligates them to work in your best interests, doing what you would do if you had the time to commit and the expertise necessary to manage your financial life.
As members of NAPFA since 1997, Payne Wealth Partners is committed to providing solid, objective financial advice to our clients. We strive to inform and educate our clients about prudent wealth management methods, providing strategies and solutions to help them live their best life and leave a powerful legacy. At Payne Wealth Partners, we seek to truly be partners in financial management with each client we serve.
Still have unanswered questions? Want to speak to a true adviser who is legally required to put your interest first?
Start a conversation with us and we’ll get back to you within one business day to answer your questions and see if we can help you reach your financial goals.
Published: February 27, 2015
Authored By: Ann Pendley
Direct Phone: (812) 602-6304
Share your thoughts by tweeting to @PayneWealth or follow us for more useful information!The information in this material is only as current as the date indicted, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. While all information prepared in this document is believed to be accurate, any statements of opinion constitute only current opinions of Payne Wealth Partners, Inc., which are subject to change and which Payne Wealth Partners, Inc. does not undertake to update. Accordingly, you should not put undue reliance on these statements.