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The Alphabet Soup of Financial Advice: Part IV - Advisor Fees

No series on becoming an educated consumer of financial advice would be complete without discussing the multiple ways your advisor can be paid.

Why does it matter? First, you want to make sure the advice is adding more value than it’s costing you. You also want to avoid arrangements that pit your advisor’s incentives against your own best interests.

There are three main compensation arrangements:

Fee-only –These advisors are paid solely by you, for the advisory services they provide. Fee-only advisors do not accept commissions or other outside sources of compensation.

Commissions/incentives – As I covered in my article about job titles, some “financial advisors” are also stock brokers or insurance agents. These advisors typically receive incentives from vendors or their employer for selling you products or trading in your investment account.

Fee-based – Some advisors dip from both pots. Most of the time, they will be paid by you, their client. Other times they switch hats and will earn commissions from the financial products they sell you.

Regardless of compensation method, I believe the most important quality is full transparency. If your advisor receives commissions but happily discloses them and fully answers your questions about them, you can still determine whether it’s worth it to you. If, instead, he or she is unclear or unforthcoming about the same, think “red flag.”

The trick is to know which hat is being worn when evaluating the advice being offered. A commission-based advisor may say something like: “You’re not paying me. I’m compensated by my employer.” That may be technically correct, but how is the “employer” getting paid? Hint: it’s still you, just less obviously. Out-of-sight is still out-of-pocket.

Hopefully, the financial service industry will eventually become more like other professions where all fees are clearly stated in dollars and cents. Until then, you owe it to yourself to ask your financial advisor: “How are you paid and how much is it costing me?”

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