At a recently meeting where I was trying to explain how my fee structure aligned my interests with that of the client’s I was told bluntly that “nobody cares what is in it for you. You need to think about it from (the client’s) point of view.” While I whole heartedly agree with this notion when it comes to explaining benefits, I disagree with the notion that the client does not need to care about what is in it for the advisor.
If more people took the time to ask what is in it for their advisor, they wouldn’t have to worry about the intentions of the advice they receive. For example, if you are working with a commission based advisor, he only makes money when there is a transaction. Times are tough right now, and this particular person’s advisor had just moved almost their entire account to “A” share mutual funds that paid 5.75% commission. The advisor made over $6,000 in commission. The client had no idea. They didn’t even know why they were moved. The client hired me to double check their advisor. Obviously there are some questions regarding the interest of the advisor.
There are always going to be conflicts of interest no matter which form of compensation your advisor chooses, and there are also always going to be advisors that are unethical no matter what compensation method they apply. To find out what is in it for your advisor, ask them.
How much are you compensated? Know what your advisor earns when he offers advice. Ask if he gets a commission. If he does, ask him how much? If he will not be straight forth, you should be suspicious. Get it in writing.
Are there any conflicts of interest with the advice you are giving me? It is your right to know if he suggests you buy this annuity that it may tie your money up for longer than you want, thus conflicting with your interest to maybe use it to pay for extra expenses incurred in this bad economy.
While many believe fee-only to have the least conflicts of interest, there are still conflicts. The conflicts of interest with charging a percentage based fee (my compensation method) are that the advisor may dissuade the client from removing assets, such as to pay down debt, or he may take increased risks to increase the value of the account. In this particular plan I advised the client to pay off all her debt, and reduce their overall risk through diversification.
Credentials – According to the new Code of Ethics from the CFP Board of Standards, as of July 1st, 2008, Certified Financial Planners are required to disclose their compensation methods to prospective clients. They are also required to act as Fiduciaries in putting their clients interest before their own. They have always been required to disclose any conflicts of interest to the client.
When it doubt, look for a fee-only Certified Financial Planner. Anyone using these marks have Codes of Ethics they must abide by that will let you know what is in it for the advisor.
