Want to learn more about your finances? First, know more about your financial advisor
Q: I am preparing to change careers (earning less and having more fun) and I want a professional to help me with the transition. I’m interviewing financial advisors who can help me with the income planning and Medicare/Social Security options, along with creating a tax-smart paycheck from my savings. Advice please.
A: A quick review of how financial advisors get paid may be helpful. Ideally, you’ll partner with a CFP® who does comprehensive financial planning and is dedicated to putting your best interests first. Their skills, experience and ethics must align with your values, goals and dreams.
Understand how your advisor/wealth manager is compensated. Financial advisors can be paid in three very different ways.
Some are compensated strictly on commissions. They earn money when they sell investment products and process transactions. Since their income is tied to the products they recommend and sell, this model has the potential to create conflicts of interest.
Fee-based is a hybrid method that combines elements of both fee-only and commission-based compensation. Advisors may charge separately for financial planning services while simultaneously earning commissions on the sale of certain products. To understand whether the recommendations truly prioritize your best interests, it’s time to do some due diligence.
Mutual fund and ETF fees are straightforward. The key is the net expense ratio; that includes the professional services of the team that runs the fund and miscellaneous ancillary expenses. But watch out for a distribution charge called a 12(b)1 fee, which is a sales charge. Fees may also come in the form of “Class A” shares that usually have a front-end sales load, meaning investors pay a fee when they initially purchase the shares. “Class B” shares may have a deferred sales charge that punishes the investor if the shares are sold within a time frame that decreases over time. “Class C” shares typically don’t have a front-end sales load, but they usually have higher annual expenses and a surrender charge if sold within a year. “Class C” shares often convert to lower expense “Class A” shares after a defined holding period, reducing ongoing expenses.
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Separately managed accounts don’t have prospectuses. Managers list their fee structures in a regulatory filing (Form ADV), and you have to contact the manager to get it. It’s not standard; sometimes it’s negotiated or scaled as a wrap fee of 1%-3% per year of assets under management. There isn’t an independent professional approach to evaluating the performance or risk, as compared to ETFs and funds that have an additional layer of oversight.
A fee-only financial planner is paid directly by the client. There is a fiduciary duty where the advisor is both legally and ethically bound to act in their client’s best interest. These planners often choose the least expensive index funds and charge about 1% of assets under management. When working with a fee-only advisor, you can trust the advice and recommendations to be unbiased, transparent and without conflict of interest.
This allows planners to focus on what truly matters – your financial good health and overall well-being. Free from the pressures of chasing commissions, they dedicate more time to critical aspects of financial planning such as goal setting, detailed tax planning, guiding and fine-tuning estate documents, reviewing risk and recommending mitigation strategies, designing tax-efficient gifting and much more.
The National Association of Personal Financial Advisors (NAPFA) is a not-for-profit, professional organization that recommends fee-only fiduciaries. Check out their website https://www.napfa.org/about-us and their Financial Advisor Comparison Tool.
Mary Baldwin, CFP®, is a fee-only financial planner at Buckingham Strategic Wealth in Indian Harbour Beach. Contact her at 321-428-4555 or mbaldwin@buckinghamgroup.com.
For informational and educational purposes only. Individuals should speak with a qualified financial professional based on their own circumstances to determine if the above is appropriate. The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®.
This article originally appeared on Florida Today: The health of your wealth: Who's keeping an eye on your finances?
