The consensus among industry experts in a recent article by Investment News suggests that financial advice needs to be more focused on the consumer and achieving their personal goals. For the longest time, however, financial advice has been littered with commission-based products, complex annuities with lengthy surrender charges, and mutual funds stuffed with hidden fees. But change is coming, and more advisers are trying to eliminate conflicts of interest and become fiduciaries, by putting their client’s needs ahead of their own.
1) n. from the Latin fiducia, meaning “trust,” a person who has the power and obligation to act for another under circumstances which require total trust, good faith, and honesty. (Source)
There are 3 Primary Adviser Compensation Models:
Commissions – Stockbrokers were initially needed to gain access to the market to buy and sell securities. Today these ‘registered representatives’ are only required to make sure an investment is ‘suitable,’ such as in risk level or income needs of a client. They have no fiduciary duty of care, and therefore, may have incentive to recommend products based on the compensation they receive, rather than on a client’s needs.
Commissions and Fees (or ‘Fee Based’) – Many advisers today fall into this category. They often are registered reps. or independent advisers (or registered as both) that charge a fixed fee for investment planning services, but also sell annuities, life insurance products, REITs and other commission generating products. In other words, they wear different hats, sometimes acting as a fiduciary and sometimes not.
Fee-Only – According to the Fee-Only Network, there are more than 1,500 NAPFA Registered Fee-Only Advisers. In my opinion, this model is the purest, and minimizes conflicts of interest. These fiduciaries are paid only by their clients for their time and expertise. The focus is on formulating, implementing, and monitoring a personal financial plan, not a product.
The future points toward a fiduciary standard, where more and more advisers will focus solely on putting the client first. John Bogle, founder of Vanguard recently said, ‘The ultimate good is serving the consumer’ and that ‘I would call it being on the right side of history’. Many people are tired of worrying about the ulterior motives of their adviser. These people may want a relationship built on trust and advice that enhances their wealth. Is your adviser a fiduciary?