How to check if an advisor or firm is fee only.
What is a “fee-only” advisor?
Since the advent of the internet the dissemination of information (true, false, or somewhere in between) has multiplied in volume and speed at an exponential rate.
So, when people want to find help with their finances, Dr. Google is the first place they go. My practice is mission oriented. We believe in certain immovable truths, one of which is transparency with our clients. I have seen behind the curtain, and to be completely honest, about 50% of my motivation for starting my firm was to help hard working people avoid Wall St separating them from their money as quickly as possible. If we save one client’s accounts from the predations of high fees and commissions, that is a win.
But off my soap box. At some point along the way it permeated into the American mind (correctly) that a “fee only” advisor was the way to go. Parallel with “fee only”, the word “fiduciary” rapidly gained popularity. If I interview 100 perspective clients per year, I will be asked 100 times if I am a fiduciary.
But what does “fee only” refer to when talking about financial advisors? To keep it short it means one of two (or sometimes both) things.
- An advisor who produces a financial plan for a client for a flat or hourly fee.
- An advisor who manages assets for a flat fee, or a percentage of those assets. This type of advisor cannot legally buy or sell securities for a commission.
This means that the advisor’s and the client’s interests are aligned not only from an ethical standpoint, but also from a business standpoint. The better the client does, the better the advisor does. And the advisor cannot generate extra revenue by “churning” their clients’ accounts.
A true fee-only advisor will not only be a fiduciary by law but also have no incentive (and no real way) to act in anything other than their clients’ best interest.
In 2017 Fidelity Investment Advisors found that only 5% of financial advisors and planners were actual “fee only” fiduciaries. The ground is shifting, but Wall St is loathe to give up the untold sums of extra fees and commissions from the old model.
Unfortunately Wall St also has the internet.
Enter the “hybrid” firm. Wall St knows that people gravitate towards the words fee only and fiduciary. Wall St also knows that holding yourself out as a fiduciary, when you can only charge commissions, is a fantastic way to get the SEC to come knocking on your front door. To win the internet search game and maintain their profit margins Wall St came up with a business model that has both registrations. One that allows them to truthfully advertise being fee only and a fiduciary, and the other that allows them to charge commissions on investment products.
Today, almost all firms that are not part of that very small, fee only model, can legally hold themselves out as fiduciaries.
So how does a company that can buy and sell your investable assets and earn commissions still advertise and say they are a “fee only” or “fiduciary” advisor? It’s called “dual registration.” One channel of the firm is fee only, the other is able to buy and sell securities for commission.
The only way to check if your advisor or prospective advisor is fee only is to look up their licensure on the Financial Industry Regulatory Authority website. In no time you can tell if you are working with someone who is only able to charge a flat fee, or someone who is dual registered and can do either.
To look up an advisor or company simply go to https://brokercheck.finra.org/.
Type in the name of the advisor or firm, the state they are in, and hit “search.” You will see one of three things. You will see that your advisor or firm is an Investment Advisor, a Broker, or both. It will look like this.
Only the “IA” filing indicates an advisor who is a fee only fiduciary.
Am I saying that your hybrid advisor is churning your investments? Am I saying that your broker is a bad guy? Absolutely not. I have friends in every part of the business. We all wake up every day and go to work to do the best for our clients, about whom we genuinely care.
What I am saying is this. There is only one way to be sure that your google search for “fee only” or “fiduciary” investment advisor yields the results you want. You must look for yourself and understand that 100% of investment advisors are going to tell you they are a fiduciary. Only a small fraction will have the legal and business model that guarantees no conflict of interest between your bottom line and that of the advisor.
