Understanding financial professionals’ fees and compensation, Part 4By Joe Wirbick
In most states, in order for financial professionals to carry the title of adviser, they typically must pass either the series 65 or 66 exam, or obtain a highly qualified professional designation such as the CFP (certified financial planner). Also the individual must be an investment adviser representative of a registered investment advisory firm (also known as an RIA).
These distinctions give advisers the ability to charge you fees for their planning advice, as well as the ability to charge you a fee based on a percentage of your portfolio assets (whether they manage it directly or solicit it to a third-party money manager). This differs from commission-based representatives who only charge when they buy or sell assets.
Fee-based representatives may be appealing to people that like the idea that their adviser is not motivated to buy and sell positions just to get paid. The belief is that fee-based advisers will do their best to grow the assets since the adviser’s compensation is tied directly to the success of the customer’s portfolio. Some feel this ties the adviser to the wants and needs of their customers more so than other compensation models.
Upon entering an agreement with advisers, they will disclose their fee schedule. This schedule cannot change unless a new agreement is entered into. The adviser also will supply you with an ADV Part 2b. This is a document that covers areas on which advisers may advise clients, and areas on which they cannot. This also will give a history of the adviser’s record. If there were any complaints in the past, it would be disclosed here.
The state sets maximum amounts that can be charged by advisers, and it is up to the firm to set its own fees within these limits. These fees will be found in the firm’s ADV, so it is in your best interest to look around and see what others are billing.
You want to do what is best for you and your hard-earned money, so taking the time upfront, doing your homework and interviewing multiple professionals that offer different pricing options is a wise way start. Going in with a list of questions to ask during the interview is always a great idea. This will help you to better understand the person sitting in front of you and may help you pick that one professional you can feel comfortable with for years to come.
Joe Wirbick is president of Lancaster financial services firm Sequinox and specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.
* Read Joe's previous entries on the fee-based planning model and the commission-based planning model.