The world of financial planning is like the open road. When you hit the road on your motorcycle or in your RV, you take a road map so you don’t get lost. The map is a guide that brings you to your final destination.
Just like motorcycling or RVing, you need an advisor who is going to guide you to your ultimate investment goal. That may be retirement or something short-term like saving for your child’s college education. No matter your destination, you’ll find distractions on your journey.
On the road, billboards and advertisements entice you to stop and spend your money. In the financial world, advisors advertise their qualifications hoping to entice you to invest with them.
While investing is on your mind, earning an income is on the advisor’s mind. Of course, all advisors are paid for helping you. However, it’s HOW they are paid that matters.
As an investor, you have to distinguish between all the advertised financial titles. They all mean something different. The titles impact how the advisor makes a living, his ethical standards, and educational background.
How financial advisors make money
Let’s talk about how advisors are paid. Then we will get to the qualifications that matter in the financial industry.
There are commission-based, fee-based, and fee-only advisors. There is a big distinction between fee-only and fee-based, even though they sound similar.
With fee-based, the advisor can earn commissions and fees. However, the advisor can’t earn the two sources of income on the same product.
A fee-only advisor earns an income from fees paid by the client. This tends to reduce potential conflicts of interest. The advisor doesn’t have a financial incentive to sell you a product. Instead, he makes decisions based on your best interests.
You should ask your advisor how he is paid along with these other questions since there is such a big distinction between how an advisor is paid and the impact on your money.
Consumer advocates, including Consumer Reports, agree a fee-only financial advisor is best.
We recommend fee-only advisers because they offer the most protection from inherent conflicts of interest. They charge a flat fee, an hourly rate, or a percentage of assets under management, usually about 1 percent.
The advisor earns the fees hourly, monthly, on a per-project basis, or as a percentage of the investments managed.
Why fee-only financial advisors matter
There’s a big push in the financial industry to make sure you get what you pay for. New fiduciary regulations ensure the advisor puts your interest first.
A fiduciary must act in good faith and disclose the fees and expenses.
It’s unclear how much investors will be helped by the new regulation, even though transparency is the purpose.
The White House Council on Economic Advisors found investors lose $ 17 billion a year from non-fiduciary advice. That’s because your advisor may steer you toward financial products that are not in your best interest, but they are in the best financial interest of the advisor selling that product.
With a fee-only advisor, you don’t have to worry as much about these new rules. You know your advisor is always acting as a fiduciary and putting you first because you pay a fee. There are no hidden fees, commissions, or conflicts of interest. What you see is what you get.
The advisor steers you in one direction. That’s the direction that’s best for you, the investor.
If the advisor is a member of the XYPlanningNetwork (XYPN), the advisor goes one step further. He signs a fiduciary oath.
In the XYPlanningNetwork, there are no commissions, no sales, and no minimums.
No matter your age or assets, you can find a fee-only financial advisor to help. XYPlanningNetwork advisors focus on working with Generation X and Y investors.
How to find a fee-only financial advisor
The word financial planner is broad and requires further research to determine exactly what qualifications the planner has to manage your money.
Financial planners can belong to a number of networks, but they are not created equal.
Consumer advocates agree, including Consumer Reports, that you should look for “Certified Financial Planners.” These planners agree to strict ethical standards and act with your best interests in mind. The certified financial planner must pass a difficult and detailed exam (CFP Certification Exam), and meet other educational standards.
When you search for a Certified Financial Planner, you will see how the planner is compensated. CFP’s can get paid in a variety of ways, so you will find more than just fee-only advisors on this list.
NAFPA-Registered Financial Advisors
The National Association of Personal Financial Advisors (NAPFA) is an even better resource. To earn the NAPFA-Registered Financial Advisor title, an advisor must meet high professional and ethical standards.
The qualifications are so strict more than half of those who want to join the NAPFA network are denied when they initially apply.
YOU are the focus of NAPFA-Registered Financial Advisors. These advisors are fiduciaries all the time. They look at your entire portfolio to grow your money.
Since we are looking at your investments holistically, at Open Road Wealth Management, our software tracks your assets and liabilities in one spot. This is done even if your funds are in different investment accounts. Organization is often the biggest financial obstacle to overcome.
You can also find NAPFA members on the Fee-Only Network, which works in partnership with NAPFA.
Todd's Takeaway
You want to make sure your advisor doesn’t have a conflict of interest. He should make all decisions based on your best interests rather than the advisor’s interests to earn a living. Fee-only advisors offer unbiased advice.
Click here to download the NAPFA “Comprehensive Financial Advisor Checklist” to make sure you are researching the financial planner, asking about his credentials, experience, discipline, background, and services offered. The checklist lays out everything you need to ask before you hire a financial advisor.
This comparison tool from NAPFA is a step-by-step guide that’s even more comprehensive. The guide walks you through the questions you should ask an advisor and explains what the answers really mean.
Trade groups are always a good way to find an advisor. Whether it’s Certified Financial Planners (more than just fee-only advisors), National Association of Personal Financial Advisors, Fee-Only Network, or an XYPlanningNetwork advisor.
See you on the Open Road!
Todd Minear,
Fee-Only CFP©
