Fee-Only vs. Fee-Based. Fiduciary vs. Suitability. It’s Murky Out There.

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Looking for a financial advisor can be a little nerve-wracking. The thought of handing your money over to someone that you don’t know well, or possibly at all, and trusting that they are going to do what is in your best interest is not an easy step to take.

There are a number of questions that float around out there when you are looking for a financial advisor- ones that may have you stumped. A few of the questions that I hear most frequently and seem to cause the most confusion are:

1. What is the difference between a fee-only advisor and a fee-based advisor?

2. What is the difference between a fiduciary duty and a suitability standard?

3. What is a CFP and should my advisor have these credentials?

4. Where can I locate a trustworthy advisor in my area?

These are all excellent questions and ones that need to be addressed before taking that leap of faith and putting your trust in anyone to manage your money. Be sure to understand these basics before making any big decisions.

Fee-Only vs. Fee-Based

Fee-only financial advisors are just what they sound like- advisors that receive a fee only. This fee is generally paid hourly, monthly, flat, or based upon a percentage of assets under management. Fee-only advisors provide comprehensive advice that is in the best interest of their client. They do not have any conflicts of interest as they do not accept any additional fees or compensation based on product sales. Fee-only advisors have a strict fiduciary duty to do what is right for their clients. Many fee-only advisors have worked hard to pass rigorous exams to obtain a professional designation, such as Certified Financial Planner (CFP), which holds them accountable to strict codes of ethical and professional conduct.

On the other hand, fee-based financial advisors are advisors that may charge fees as well as commissions based on the products that they are trying to sell to you. They have a much greater incentive to sell products that may not always be in your best interest, due to the way that they are compensated. There is more of a conflict of interest- between your wallet and theirs.

Fiduciary Duty vs. Suitability Standard

Fee-only financial advisors are held to a strict fiduciary duty. meaning that they are legally bound to give you sound advice that suits your particular situation and meets your needs. Additionally, the financial advisor is responsible for ensuring that all of the information that he/she is giving you is accurate and has been researched appropriately. An advisor who is held to their fiduciary duty must also disclose any potential conflicts of interest to their client prior to giving any financial advice.

Most fee-based financial advisors are held only to the suitability standard. Again, these are commission-based advisors who get paid from a percentage of the money that you are investing. Under the suitability standard, they are only legally required to be sure that the investments are suitable for their client, and they are not held to the standards of disclosing any conflicts of interest.

What Is a CFP?

A certified financial planner. or CFP. has passed a test administered by the Certified Financial Planner Board of Standards. Most fee-only advisors have this designation, and have gone through extensive studying to receive this designation. They must commit to ongoing continuing education to maintain this designation. The CFP Board states, “those individuals who have been authorized to use the CFP certification marks in the U.S. have met rigorous professional standards and have agreed to adhere to the principles of integrity, objectivity, competence, fairness, confidentiality, professionalism and diligence when dealing with clients.”

Where Can I Locate a Trustworthy Advisor In My Area?

I suggest looking for a trustworthy, fee-only financial advisor through an organization called NAPFA. the National Association of Personal Financial Advisors. This is a network of fee-only financial firms and advisors who specifically do not work on commission or the sale of any particular financial product. The website will help you find a fee-only financial advisor near you in any area of the country. Here is a description taken directly from the NAPFA website:

“The National Association of Personal Financial Advisors (NAPFA) is the country’s leading professional association of Fee-Only financial advisors- highly trained professionals who are committed to working in the best interests of those they serve. Since 1983, Americans across the country have looked to NAPFA for access to financial professionals who meet the highest membership standards for professional competency, client-focused financial planning, and Fee-Only compensation.”

Do you have a financial advisor? If you are looking for someone that you can trust, be sure to take into consideration if they are fee-only or fee-based. It can make a significant difference in the way that your money is managed.

Wes Moss is the Chief Investment Strategist and partner at financial planning firms Capital Investment Advisors and Wela Strategies. He is the host of the Money Matters radio show on WSB Radio, host of the TV show Atlanta Tech Edge on Atlanta’s NBC affiliate, and in 2014, he was named one of America’s top 1,200 financial advisors by Barron’s Magazine. He is the author of several books including his most recent, You Can Retire Sooner Than You Think - The 5 Money Secrets of the Happiest Retirees , which has been one of Amazon’s best-selling retirement books in 2014.

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