Recently, T.D. Ameritrade conducted a study that shows investors are not aware of the difference between different types of financial advisors. The study found that: 1) Investors are often not aware that there are two types of (investment) advice available to investors: fee-only investment advisors and stockbrokers. 2) 54% of investors believed both stockbrokers and fee-only advisors have a responsibility to act in their best interests. 3) 74% of investors did not understand the different obligations required of fee-only advisors and stockbrokers. Who are Portafina
The differences really do matter. The fee-only system eliminates conflicts of interest by guaranteeing that the adviser will receive compensation from no source other than client fees. Other ways to invest (performance fees, brokerage houses, affiliated managers, etc.), include incentives for an investment manager that conflict with a client’s interests. Many managers choose products with which they earn higher commissions, trade more actively, or take on too much risk.
Many advisors who are not fee-only have a product-based approach. This is where a specific product is recommended or sold to the client, often without regard for the client’s particular financial circumstances and goals. Transaction, commission, and fee-based advisors are typically trained on only the products they sell or recommend, thereby taking a product-based approach to their clients’ portfolios.
The problem with the product-based approach is with process. Comprehensive financial advice should be a process with multiple steps, integrating the client’s holistic financial and non-financial situation. Fee-Only financial advisors take a holistic approach with each client, and offer more objective advice on a myriad of investment options.
Of the planners that are not fee-only, some are compensated entirely by commissions from the providers of the products they recommend and sell. Others, referred to as “Fee-Based” or “Fee-Offset,” charge both a fee and receive commissions from selling products.
The greater the advisor’s dependence on commission income, the greater the conflict. In the end, that conflict can cost you, both in out-of-pocket expenses and the objectivity of advice you receive.