The term 'fiduciary' is becoming more commonplace in the investing community, but what does it really mean? A fiduciary is someone who acts in their clients best interests. Plain and simple, right? Not quite. Stock brokers or registered reps, along with their respective firms, are not legally required to act in the best interests of their clients. We call these types of advisors “part-time fiduciaries”, or salespeople.
It is imperative investors understand the various ways financial professionals are compensated. How compensation is received may impact the advice you receive. As we've outlined in the compensation models below, there are 3 common models of compensation. Fee-Only is the only model requiring a financial advisor to act in a client’s best interests at all times. We call these advisors “full-time fiduciaries.” TFA believes all investors should demand their advisors be legally responsible to be full-time fiduciaries, much like a physician or attorney.
Fee-Only Compensation – This model minimizes conflicts of interest. A Fee-Only financial advisor 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 advisor 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.
Commission and Fee – This form is often called Fee-based to bring similarity to Fee-Only, but it’s not the same. Commissioned and Fee-based advisors 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 lessens the advisor’s ability to keep the client’s best interests first and foremost.
Commissions – An advisor who is compensated through commissions is primarily a salesperson. A client working with a commissioned sales person must always ask themselves: Is this advice truly in my best interest, or is it the most profitable product for the advisor? Unfortunately, often the answer is the latter. In fact, a commissioned advisor usually is required to put the best interests of the employer ahead of the best interests of the client. If you are not paying your financial advisor, who is? That is who they work for.