Once I read Ed Mahaffy’s book titled “How To Select A Financial Advisor: The Least You Should Know”, interviewed him, reviewed his video library, I knew we had the right person for this special financial planning series. On Fridays, TaxConnections presents questions often asked of a Financial Planner.
Kat Jennings, TaxConnections, CEO
Ask Ed: Financial Planning Questions And Answers
Question: Are you currently engaged in any other business, either as a sole proprietor, partner, officer, employee, trustee, agent or otherwise?
Answer: By knowing what other business ventures a financial advisor is involved in you will better understand if there are any conflicts of interest with regard to the advice that you may receive. This is especially important if the advisor is involved with an investment-related entity. Ask for a detailed account of how that relationship will impact the advice he/she will provide you.
Question: Does any member of your firm act as a general partner, participate in, or receive compensation from investments you may recommend to me?
Answer: Ask your prospective financial advisor if he/she is limited to presenting certain types of investments or investment products to you. If so, inquire why he/she is limited, and how this might affect the success of attaining your goals and/or the amount of fees to be paid.
Question: Are there financial incentives for you to recommend certain financial products?
Answer: Commission-based advisors may receive higher commissions on certain products they sell on others. They may also receive incentives like special awards, bonuses or trips based on sales volumes. This may influence their decision to recommend investment products that are not in your best interests. Ask your prospective financial advisor how his/her recommendation might affect the success of attaining your goals, and/or the amount of fees you will pay(immediately, and over a period of years). Fee-only advisors do not have this conflict of interest; they are able to recommend investments based solely upon your specific needs.
Whenever clients request a referral to a financial advisor, do you require your recommendations meet the highest standard of care – the fiduciary standard – requiring the advisor ALWAYS place clients’ interests first and to fully disclose all conflicts of interest as well as all sources of compensation.
Most financial advisors are dually licensed as investment advisors as well as brokers. They may only be held to the fiduciary standard when overseeing fee-based accounts and not when selling financial products. They earn both fees and commissions.
This is how clients are sold certain financial products that may prove much more lucrative to the advisor than the client as the operating expenses of these products might be high enough to cover the steep, ongoing, and often hidden commissions, presenting a huge headwind for investment performance versus index funds or ETFs, with their near zero operating expenses. This is a major reason why approximately 80% of mutual funds underperform the market.
By contrast, Fee-Only Registered Investment Advisor firms (RIA) are full-time fiduciaries and required to fully disclose any conflicts of interest and all sources of compensation. As part of our due diligence when making a referral, consider Fee-Only investment advisors in the competitive mix.
What is the easiest way to identify whether an advisor is a fiduciary 100% of the time? Easy, just make them sign the following statement:
NAPFA Fiduciary Oath
The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor.
The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client’s purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the clients business.
Following the NAPFA Fiduciary Oath means I shall:
-Always act in good faith and with candor.
-Be proactive in disclosing any conflicts or interest that may impact a client.
-Not accept any referral fees or compensation contingent upon the purchase of sale or a financial product.
(How To Select A Financial Advisor – Ed Mahaffy)
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