Why Should You Care About “Fiduciary” and “Fee-Only”?
Shopping in the financial services industry is convoluted and difficult. For example, if you are researching the available options for assistance with your financial life, you will run across “financial advisors”, “wealth managers”, “financial consultants” and “financial planners”, among others. There is no common definition of what each of these roles mean or a standard list of services they deliver. There are few minimum standards to be met to add one of these titles to your business card.
With all of the noise, I recommend looking past titles and brands and focusing on the criteria you use when making any important service purchase, including quality and type of services offered, price and value. In addition, I believe that there are two important characteristics that should be non-negotiable:
Fiduciary. First, your advisor should be legally obligated to put your interests first at all times. In a nutshell, this is what being a fiduciary means. Depending on the type of firm your advisor works for, they may or may not be held to this standard. Ask them and get it in writing.
Fee-Only. Second, your advisor should offer services on a “fee-only” basis. What does "fee-only" mean? Fee-only advisors are compensated directly by their clients for advice. The fee may be paid as a flat fee, hourly or as a percentage of assets (AUM), depending upon the advisor and service you choose. Fee-only advisors do not receive any commissions or bonuses from the financial products (such as mutual funds or annuities) they recommend to you. This helps them make recommendations that they believe are truly best for you, rather than ones that are good enough for you and good for the advisor.
Additional Resources
Here are some additional resources on these topics from the National Association of Fee-Only Financial Advisors (NAPFA), of which I am a member. NAPFA requires its members to be both fiduciaries and fee-only (though there are many fee-only fiduciary advisors who are not NAPFA members).
