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By: Catherine Hawley, CFP®, posted on 06/16/2017

What Is What: Fiduciaries, Fees and Financial Advisors

What Is What: Fiduciaries, Fees and Financial Advisors

I have to admit that sometimes I’m embarrassed by my profession.

Despite the prevalence of financial advisors (it seems like there’s one on every corner), it’s pretty difficult to find, one who genuinely has your best interests in mind.

The majority of financial advisors either don’t have a legal obligation to act in your best interest OR have connections to financial companies that incentivize them to recommend high-cost products. Or both.

So how can you distinguish the trustworthy from the untrustworthy? Here are some key variables to consider.

Fiduciary vs. Non-Fiduciary

You may have heard the term fiduciary in the news recently, and it’s an important term to understand if you’re looking for a financial planner.

fiduciary is someone who is required by law to act in your best interest. In the world of financial planning, a fiduciary is required to recommend the strategies and products that will best help you reach your personal goals, even if they aren’t in the financial planner’s best interest.

It might seem surprising that, many professionals who hold themselves out as financial planners are not fiduciaries. Many are simply representatives of financial companies tasked with selling that company’s products.

Others are fiduciaries sometimes and not other times. Our laws actually allow financial advisors to be fiduciaries when they’re giving advice, but then to “switch hats” and drop the fiduciary role when they recommend products. So you might get good advice about your overall investment strategy, but then be sold investments that are much more expensive than available alternatives.

It’s too bad that “doing what’s in your client’s best interest” is a differentiator, but it’s simply the current state of affairs. You deserve a financial planner who is a fiduciary 100% of the time.

Fee-Only vs. Fee-Based vs. Commission-Only

This might sound strange at first, but how your financial planner gets paid can have a big impact on their ability to make objective recommendations.

Here are the three main categories that most financial planners fall into:

  • Fee-Only - These advisors are paid only by their clients and never receive any commissions or other payments from financial companies.

  • Fee-Based - These advisors are paid both directly by their clients and by the commissions on the products they sell. This is often confused with fee-only but it is not the same.

  • Commission-Only - These advisors are paid to sell financial products like mutual funds and insurance, earning a commission each time they make a sale.

There are good financial planners in each category, but the best way to maximize your odds of finding one who genuinely has your best interests in mind is to limit your search to fee-only financial planners.

To put it simply: follow the money. Whoever is paying your financial planner is the one who’s most likely to get preferential treatment.

Where to Find a Fee-Only Fiduciary

Unfortunately, the majority of financial advisors are not fee-only and are not fiduciaries 100% of the time. Luckily, there are a few good resources to help you find one.

I’m a fee-only financial planner and a fiduciary. You can learn more about what I do and who I serve here.

There are also a number of financial planning organizations whose members are all fee-only and all fiduciaries. Each one has a search tool that helps you find someone who meets your needs:

For more on how to conduct your search and interview financial planners, you can check out two of my favorite resources here and here.

You deserve good, transparent financial advice that helps you provide for your family and create a life you enjoy. Hopefully this helps you find it.

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