Chances are, you’ve heard of the impending Fiduciary Rule set forth by the Department of Labor. (If not – here is a brief summary). This new rule has started some important conversations on transparency and objectivity in the world of financial advice. It's also driven many Americans to rethink how their relationships with financial professionals should work.
Here are a few questions that can help you determine if an advisor you work with, or are considering hiring, is truly looking out for your interests above all else.
1. "How are you compensated?"
There are many ways that financial professionals can be compensated for their services. A few of the most common compensation models (with definitions) include:
“Fee-only” – all compensation for client work comes exclusively from the client in the form of fixed, flat, hourly or percentage-based fees.
“Commission-based” – an agent or broker can receive compensation from a transaction involving a product or service, usually calculated as a percentage on the amount of sales or purchase transactions.
“Fee-based” – this model typically charges a flat fee for some services provided, but still allows for compensation from the sale of commission-based investments or products as well.
Our Answer: We operate under the “Fee-only” compensation structure and firmly believe that, since we are only compensated by the fees our clients pay us, we are always looking out for them, not focusing on selling commission-based products or other agendas.
2. "Are you a fiduciary?"
If you are unaware of the term fiduciary, a fiduciary financial advisor is held to a standard of care that requires them to act solely in the client’s best interest when offering personalized financial advice. Working with an advisor that applies the legal definition to advice they provide and accounts they manage can be a good way to narrow down your search.
Our Answer: Yes. We believe that our clients’ interests come before the interests of any other party, including ourselves. Due to this, we act as a fiduciary advisor and are legally obligated to act solely in the best interests of you and your family when providing financial advice.
3. "What are the fees for your services and the cost of the funds you recommend?"
There are typically two different cost investors should keep in mind:
- Fees paid to an advisor for financial planning and investment management services. Typically, fees are based on level of service, but the median fee schedule starts at 1% of the assets an advisor is managing, according to the FA Insight benchmarking study.
- Fees paid to the mutual fund company managing the funds you are invested in, or the “Expense Ratio” of a fund. These fees can vary greatly, but the 2015 average for a stock mutual fund was 68 basis points (0.68%).
Our Answer: Our fee schedule begins at 1% on the first $1 million under management, but decreases on assets exceeding $1 million. There is no minimum account size, but there is a $1,250 minimum quarterly fee for individuals. Our typical portfolio, based on the expense ratios of the mutual funds we use, costs around 20 basis points (0.20%) annually.
To see other examples of questions to consider asking an advisor, as well as see our responses, check out the additional questions we discuss in our FAQs.
