Financial advisors serve as guides to prevent expensive financial mistakes, chart your financial future, and optimize the efficiency of your finances. Working with a financial planner can help ensure that you meet your financial goals and are adequately prepared for life transitions like marriage, sending children to college, and retirement. Once you understand the value of working with a financial advisor, your next question will likely be who you should hire.
Your financial advisor should be capable, experienced, and properly trained. Most importantly, they should be ethical and worthy of your trust. That’s an extremely hard qualification to identify with exactness, but an effective substitute is to make sure that your adviser’s incentives align with yours.
So, as you look for a financial advisor, you should first investigate how they receive compensation for their services. There are three primary methods of compensation in finance: commission-based, fee-based, and fee-only.
Commission-based compensation is the oldest method, in which advisers make a commission on each product they sell. Most stock brokers fall under this category. This is a fine system for anyone who knows exactly what they want already, but is ill-suited for an advice-giving setting. Commissions can hamper a long-term relationship built on trust and advice because it introduces doubt. “Is my adviser recommending this because it’s in my best interest or because it pays them the highest commission?” While there are certainly many honest commission-based advisers, the system itself is not designed for the well-being of the consumer. If all else is equal, look somewhere else.
Fee-based advisers introduce the concept of a management or advice fee. This fee is not based on sales, but on total assets managed, hourly, or some other method. In general, this system would fix many of the problems inherent in a commission-based system. However, if an adviser is fee-based, they have no restrictions against collecting a commission over and above their fee. Fee-based planners will manage your investments and sell you insurance, annuities, or commission-paying mutual funds.
Fee-only advisors are required to never accept commissions or third-party incentives, but instead charge fees only. These fees are known ahead of time and are paid only by the client. Fees can be a flat-rate, by the hour, or by the project. Because fee-only advisors make their profit based only on fees, they have no incentive guiding their advice beyond your well-being and satisfaction. Thus, they can focus on what is really important: helping you create a financial plan in your best interest that will give you stability and security throughout your life.
Although there are advisors in all three compensation systems who strive to do what is best for their clients, a fee-only adviser can give you confidence that their advice is given with your best interests in mind. As you search for a financial advisor you can trust, be sure to investigate how they are compensated. Consider hiring a fee-only advisor who can help you create a financial plan that will bring you financial security and peace of mind.
At TrueNorth Wealth, we believe that the fee-only system is one that best aligns the needs of our clients with the mission of our advisors, and we are proud to be among the minority of fee-only wealth management firms. Find out more at truenorthwealth.com.