The truth is a very small minority of investors know and understand how their financial advisor is paid.  There are TWO main types of financial advisor compensation models, theyre paid through either:

Since commission sounds like how a used car salesman is paid, the Wall Street marketing machine created a THIRD type of compensation model the fee-based financial advisor model.  Most investors think their advisor is fee-based, and most financial advisors (probably 80%+) call themselves fee based.

Fee Only Is Not Fee Based

The truth is fee based is just a mix of commissions and fees.  Fee based financial advisors can sell insurance and investments for commissions AND they can charge you fees for planning, financial advisor or investment management.  They choose how theyre compensated by the insurance and investment products they sell or recommend to their clients.  Their financial advisor compensation model is murky at best.

Its Important To Know How Your Advisor Is Compensated

Understanding how your financial advisor is compensated is a key component to hiring an advisor in the first place.  If you dont know how youre paying your advisor, how can you judge the value they bring to your financial situation?

Fee only financial advisors are highly unique in that there are roughly only 6% OF ALL FINANCIAL ADVISORS!  Granted, many advisors may say their fee only.  But if they have an association with any broker-dealer which transacts securities they can accept commissions.

Only about 6% of all financial advisors are legally structured to ONLY accept fees from clients for services.  They are independent registered investment advisor firms with no broker dealer relationship.

National Association of Personal Financial Advisors

NAPFA is the single largest association of pure fee only financial advisors.  REDROCK WEALTH MANAGEMENT (our firm) is a NAPFA registered financial advisor firm.

The Garrett Planning Network is another excellent resource for investors looking for quality financial and investment advice for a fully disclosed fee only.  I actually met several advisors from the Garrett organization at the NAPFA national conference this last May, and they are very nice people and highly qualified.

Why Does Compensation Matter To Me?

The unfortunate and ugly truth is how your financial advisor is paid can directly affect their advice to you.  If your advisor gets commissions, kick backs, perks, trips or any form of compensation other than fully disclosed fees they may be swayed to recommend investment or insurance products with their pocketbook in mind over your financial success!

A simple analogy is cars.  If you go to a Ford dealership, and the sales person gets a commission to sell you a Ford, whether a Toyota is best for your family or not matters little to him.  Hes going to try and sell you a Ford.

Insurance and investments arent much different.  If the allure of a commission payday or other compensation comes into play your advisor is human after all that may very well sway their guidance to you.  Their commission or compensation structure provides a conflict of interest.

So Is Fee Only Conflict Free?

I wish I could say the fee only financial advisor model is completely conflict free.  Its not however.  There are just FAR FEWER AND LESS OBTRUSIVE conflicts in the model.

For example, fee only financial advisors are many times paid a percentage of assets that they manage on your behalf.  For this reason, theyll always want to manage more of your assets (not unlike a fee based financial advisor).  So there is a conflict, but its an industry wide conflict not a fee only conflict.

Fee only financial advisors who take only project or hourly based fees will always have an incentive to sell you more hours of planning work, whether you need it or not!  This is a conflict, but its not unlike any other professional industry such as attorneys or accountants.  Its also a minimally obtrusive conflict because its easy to say no whereas a fat commission you dont even see may be impossible to say no too!

In The End

In the end its important for you to understand what type of financial advisor youre working with and how theyre compensated.  It just make sense.  If you dont know how much youre paying them, how can you gauge the value theyre adding?