Author: Darrell R. Tierney CFP® CPA PFS
Choosing a professional is difficult, particularly a financial advisor.
Unlike doctors, lawyers and CPA’s, anyone can call themselves a “financial planner.” The term is of no help to the public. To protect yourself, I suggest you look for two criteria. Make certain that they:
- Are “Fee-Only”
- Have earned the CERTIFIED FINANCIAL PLANNER™ (CFP®) mark.
If you need a shortcut to finding an advisor, stop reading and go to NAPFA (The National Association of Personal Financial Advisors) www.napfa.org. NAPFA is the nation’s leading organization of Fee-Only, holistic financial planners.
If you search for a financial planner on your own, beware of a trap for the unsuspecting consumer. “Fee-Only” means the advisor does not accept commissions, referral fees or any compensation based on product sales. The client pays the advisor – PERIOD. Here’s the trap, “Fee-Only” is a misunderstood term. In 2015, industry-insider Michael Kitces pointed out that CNBC named the Top 100 “Fee-Only” wealth management firms. The problem is that nine out of top ten of these firms are NOT considered “Fee-Only” by the CFP® Board’s standards. In 2013, the CFP® governing body issued this guidance to CFP® professionals when describing their compensation methods. The firms on CNBC’s list are not “Fee-Only” according to the CFP® Board because they own related entities that generate commissions or referral fees. If CNBC improperly classified these firms as “Fee-Only”, how is the general public expected to understand?
The misunderstanding is that some firms are not compensated by INVESTMENT commissions.
These firms form affiliates that sell insurance products or offer legal services for commissions or referral fees – same owners, similar name. Some of these firms may also keep their client assets at independent custodians like T.D. Ameritrade, Fidelity or Charles Schwab, but pay their custodian referral fees for sending them clients. They disclose these conflicts in the fine print (required by the SEC in form ADV Part 2) so they can honestly say they “disclosed” the conflict of interest, but alas many people don’t bother to read the fine print.
I should point out that the firms with commission-earning/referral fee generating affiliates are not doing anything illegal or evil. They generally make the appropriate disclosures and obtain proper licensing. It’s just good information to know to assess potential conflicts of interest. You wouldn’t expect your Toyota dealer to sell you a Honda. I wouldn’t expect a wealth management firm with an affiliated law firm or insurance agency to refer you to outside attorneys or insurance agencies, even if it’s in your best interest. Nor would I expect a brokerage firm that gets paid for referrals to send you to an advisor that won’t pay them.
Here’s how to protect yourself.
I suggest you hire a CFP® professional. To determine how they are compensated, I suggest you check here. You’ll get the straight answer. When interviewing an advisor, ask directly, are you engaged in any other business or have an affiliate that might benefit from our relationship? How does the compensation work? Are you paying someone that referred me to you?
Knowledge is power!
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