Choosing a financial planner is an important decision. You are entrusting someone with your goals, financial security, and peace of mind. Although all advisors share the same job title, their standards and legal requirements can be very different.
Some financial planners are legally required to act in your best interest. They are called fiduciaries. Other planners are required to recommend/sell “suitable” products to you (not necessarily the best). And to make it even trickier, some planners switch between both of these throughout their relationship with you.
Finding out which type of planner you are talking to can be difficult; you won’t see an advisor advertising their suitability standard. So, we recommend asking these questions to find out if you’re talking to a true fiduciary.
“How are you compensated?”
Fiduciary response: “I am a fee-only advisor and charge a percentage of the assets that I manage for you. I don’t receive income from any other source and I do not accept any commissions.”
Advisors under the suitability standard often receive commissions and have a complex web of ways that they can earn money. They may earn money by selling certain products or companies. Also, watch if they say they are fee-based. This sounds very similar to “fee-only,” but it actually means they charge a fee and also can accept commissions.
“What are the total costs I will have to pay?”
Fiduciary response: “The two costs you will have to pay are my 1% fee and the cost of the investments themselves, which I do not receive any income from. We use low-cost funds that cost 0.1% or less.”
Other advisors may charge a commission every time you buy and sell an investment and may recommend funds with high costs, because they make more money on them. These planners may also be very vague about the expenses, and you won’t truly know exactly all the costs involved.
“What is your investment philosophy?”
Fiduciary response: Fiduciary advisors will discuss having the proper asset allocation for you and your goals. They often believe in passive investing, diversification, and using low-cost funds.
Other advisors may recommend strategies that require specific products or high-fee investments.
“Will you always act in a fiduciary capacity?”
Fiduciary response: “I will act in fiduciary capacity 100% of the time.”
Other advisors will try to dodge the question or simply say they are a fiduciary and leave out that they may also act under the suitability standard at times. “Hybrid” advisors do not act as a fiduciary 100% of the time.
“How can I check your background?”
Fiduciary response: You can look up my name on the SEC’s Investment Adviser Public Disclosure (IAPD) website. It will show you my background and regulatory record.”
Fee-only fiduciaries will only show up on the SEC’s website. Other advisers will be on FINRA’s website, or on both the FINRA and SEC websites if they are the “hybrid” advisors.
If in Doubt, Ask
Don’t be afraid to question your financial planner. Your advisor shouldn’t get defensive or answer you vaguely, especially regarding how they get paid. It’s your money, so make sure you are comfortable with the advisor you’re working with.
Looking for a fiduciary financial planner that you can trust? Reach out to us. We don’t have an issue sharing our simple pricing model, so you know exactly what you are agreeing to.