Tips for choosing a financial advisor
Choosing the right financial advisor can be one of the most important decisions that someone makes in their lifetime. A very important note when choosing an advisor is the method in which the advisor is compensated. Clients should be aware of all conflicts of interests. Here are a few compensation related conflicts of interest to consider:
Commissions
Registered Representatives of a broker/dealer (RR are not fiduciaries and are not permitted to refer to themselves as an advisor) that are paid a transactional commission do not have ongoing fiduciary oversight of client accounts, the transaction only has to be in your best interest at the time of the sale. They are paid a commission every time that they sell an investment and are generally affiliated with a broker/dealer or a mutual fund company. The main conflict of interest arises if you are looking for ongoing advice, as they are only compensated based on transactions. A commission based “advisor” would be best for someone who wants help one time setting up investments, and no ongoing advice. One thing to watch out for is are the mutual funds or products proprietary and are they “Clean shares”? A lot of mutual funds pay kickbacks to the advisor or company the advisor works for.
Fee only
Only advisors are paid a fee, which could be a flat planning fee or an asset under management fee and are not able to accept commissions. These advisors usually are affiliated with a registered investment advisor (RIA), which means they are held to a fiduciary standard, and have to act in the client's best interest at all times. Paying an ongoing advisory fee can eliminate the conflict of interest of being incentivized to sell a new investment product. This setup is generally best for someone who wants ongoing financial planning and/or investment advice.
Hourly rate
These advisors charge an hourly rate to build a financial plan, similar to the model of working with an attorney. The upside to the client is they are not charging a commission and are not selling a product and have a fiduciary duty to act in the client's best interest. However, the downside is that clients may be hesitant to reach out since they will be charged for the advisor’s time. This could be best for someone who wants help with implementing a one time financial situation where they need special advice.
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Hybrid
Some advisors will do a hybrid of the 3 above, and these advisors are generally dually registered with a broker dealer and a registered investment advisor. They are paid commission compensation for transactional brokerage business and fees (percentage of assets under management, fixed or hourly) for advisory business.
If you are looking for an advisor, it would be wise to consider the compensation structure that best aligns with your interests and make sure that you ask all the right questions before hiring a financial advisor as compensation is just one.
Equilibrium Wealth Advisors is a registered investment advisor. The contents of this article are for educational purposes only and do not represent investment advice.
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