The financial advisory world is undergoing a major transformation in how it serves up advice. More and more, advice is being decoupled from a product sale in an unbundling of services. Advisors are gaining additional certifications and better training, and industry enforcement on poor practices and unethical behavior is getting stricter. The industry is maturing and cleaning up its act as it goes.

This means more choice, more transparency, and greater confidence for consumers. But this maturing act isn’t rolling out evenly. Giant institutions aren’t transforming and leading from the top down. Many of these changes are coming from the ground up in the form of a new kind of advisor – the fee-only, fiduciary financial planner.

What is a fiduciary advisor?

Wooden dolls used to exemplify middle-man mark up.

A fiduciary is obligated to look out for your financial best interests. Its intentionally broad and can cover anything as simple as basic budgeting advice all the way up to complex hedging strategies. If the person providing advice has a fiduciary duty, then they must deliver the best advice for you given what they know.

In the financial planning world, a fiduciary duty means putting your best interests ahead of the planner’s. But it’s a little more than that. A financial planner could identify three solutions to a problem you bring to them. All work and provide a better outcome for you than your current plan does, but solution A is slightly better than solutions B and C.

The advisor will recommend solution A in a perfect world. And this is exactly what happens with an advisor that acts as a fiduciary for you! They’re obligated to recommend A over B and C. But what if solution C pays the advisor twice as much as solution A?

This is a clear conflict of interest. An advisor without a fiduciary duty can recommend solution C over A. It won’t matter to them. They’ve solved a problem and been paid. But where does that leave you?

 

Why fee-only is important

Fee-only advisors don’t accept commissions. They don’t accept soft-dollar arrangements, either, or any other third-party payments. The only revenue they receive comes directly from clients. It isn’t wrapped up and coupled with a product sale. The advice they deliver is the product.

This is a big departure from traditional financial services. Historically, financial advisors were almost always commissioned salespeople. This is still the case with most every large and well-known national brand, too! Advisors working at investment banks, wirehouses, and insurance companies carry licenses that allow them to sell commissionable products in addition to charging fees for advice.

Fee-only advisors don’t carry those licenses. They legally can’t sell commissionable products. Their business model is different and falls under a different regulatory category, which is that of a Registered Investment Advisor (RIA).

Fee-only advisors are a new breed, and they’re reshaping how financial advice is delivered.

Advice as the core business model

Without products to offer, fee-only Registered Investment Advisors are left solely with services. The core of their business model is centered around advice. For some the advice is limited only to investments. But many firms are branching out and offering additional financial planning services that range from basic budgeting and insurance advice to more advanced retirement and tax planning advice.

The key here is that this advice isn’t tangential to a sale. Fee-only RIAs are paid directly by you to provide unbiased financial advice you can trust. Conflicts of interest are far fewer than in the commission model, and when they do come up the fee-only advisor is obligated to disclose them to you. It’s a marked changed from how business has typically been done.

Is fee-only the same thing as fee-based?

In short, no. Fee-based advisors are also known as hybrid advisors. This group offers financial planning services for a fee in addition to offering products. They are registered both as brokers (to accept commissions) as well as an investment advisor representative of a registered investment adviser (to charge fees). This is the new norm for most advisors working at large national firms.

This group can swap between acting as salesperson and acting as advisor. There is nothing inherently wrong with this so long as the advisor discloses when and where they have their sales hat on vs. their advisor hat. But these frequently take the form of lengthy written disclosures that should be but aren’t always read. Even when there is clear verbal disclosure during a meeting, the fact that you may change back and forth between advice and sales through the flow of normal conversation means that delineating the two can be a challenge.

Then there’s the difficult balance these advisors must strike between managing their fiduciary obligations and their sales quotas (if one is present). The two don’t always align neatly. This leaves them with unique conflicts of interest to deal with that aren’t necessarily present in the fee-only model. It can be a difficult tightrope to walk, which is perhaps why so many of them are leaving wirehouses to join or found an RIA.

What does fee-only billing look like in practice?

No hidden fees graphic

One of the most popular billing models is known as Assets Under Management (AUM). You move a sum of investible assets to your advisor’s care. The advisor charges some percentage to manage that money and debits the fee directly from the account. The fee is typically comprehensive, meaning that it covers both investment management as well as financial planning. But in some cases it may just cover investment management.

Another popular model that has emerged in recent years is that of an annual fee. This is paid directly out of your cash flow as opposed to being debited from an account. This can disrupt your budget, but it has the benefit of making fiduciary investment advice available to those with smaller account balances or balances that can’t be moved to an advisor’s care, such as an active 401k plan. Its also a good choice for those who don’t want ongoing help and prefer advice on a flat fee paid monthly, quarterly, or annually.

In some cases, advisors may offer a combination of a flat annual fee in addition to assets under management. Whichever way it’s done, the end payor is still you and only you.

Pulling it all together

Any advisor can be a fiduciary regardless of payment model. Fiduciaries must put your interests ahead of theirs and that can be done with any business model, its just more difficult to do so consistently in a commission-based environment.

Or an advisor may be a fiduciary just some of the time. It depends on the situation for some, and that is even more confounding.

The fee-only RIA model isn’t perfect, but it does ensure a fiduciary duty at all times. This is because they are paid solely by you and therefore have an obligation solely to you. They don’t have to manage your interests against those of a product manufacturer. Its transparent and straightforward.

Ultimately, you will need to find the right financial advisor for you. This is as much about their skills, experience, competence, and bedside manner as it is about how much you trust them. There are great advisors working in all channels of the industry who can help you put together an outstanding financial plan. Find one you trust to put your best interests first and move forward confidently.

REGULATORY DISCLOSURE

Carmichael Hill & Associates, Inc. is a U.S. Securities and Exchange Commission Registered Investment Advisory firm. Registration does not imply that the SEC has endorsed or approved the qualifications of Carmichael Hill or its respective representatives to provide any advisory services. Advisor does not render or offer to render personalized investment advice or financial planning advice through this medium. Advice can only be given after:

  1. Delivery of a disclosure statement by advisor to client.
  2. Execution of our Investment Advisory Agreement between the client and the advisor.
  3. Initial payment of the planning fee or investment advisory fee by the client to the advisor.
  4. Advisor will not solicit or accept business in any state in which she or he is not properly registered or otherwise qualified to conduct business by virtue of a state “de minimis” exemption.
DISCLAIMERS

The information in this web site is based on data gathered from what the Advisor believes are reliable sources. It is not guaranteed as to accuracy, and does not purport to be complete and is not intended as the primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. The identification of specific funds and model portfolios is being made on the assumption that the investor would participate in that investment or portfolio on a long-term basis and only after consulting with their investment advisor to determine their needs and tolerance for risk. With respect to any such identification, there can be no assurance that the fund or model portfolio will in fact perform in the manner suggested.

The results do not represent actual trading due to the timing of the clients’ trades and their trading costs. They may also not reflect the impact that material economic and market factors might have had on the advisor’s decision making if the advisor were managing the clients’ money. Investment and portfolio results may be different than the results the advisor’s discretionary clients achieve due to the timing of trades and the market conditions.

All references that might be made to an investment or portfolio’s performance are based on historical data and one should not assume that this performance will continue in the future.

LINKS DISCLAIMER

At certain places on this Carmichael Hill & Associates, Inc. Internet site, live ‘‘links’ to other Internet addresses can be accessed. Such external Internet addresses contain information created, published, maintained, or otherwise posted by institutions or organizations independent of Carmichael Hill & Associates, Inc. CHA does not certify, endorse or control these external Internet addresses and does not guarantee or assume responsibility for the accuracy completeness, efficacy, timeliness, or correct sequencing of information located at such addresses. Use of any information obtained from such addresses is voluntary.