Some commission-paid financial advisors make recommendations that favor high-commission products and too frequent trading, aka churning.
A fiduciary advisor’s recommendations must seek to improve a client’s risk-adjusted returns, not maximize advisor compensation through opaque commissions.
That’s why we believe the “Fee-Only” compensation method is the most transparent and objective model for advisor compensation.
The “Fee-Only” model reduces conflicts of interest and helps ensure that your financial planner acts in your best interest when making investment recommendations. Fee-Only advisors are compensated directly by their clients for advice, not by insurance companies or product sponsors.
“A CFP® professional may describe his or her or the CFP® Professional’s Firm’s compensation method as Fee-Only only where: (a) the CFP® professional and the CFP® professional’s Firm receives no Sales-Related Compensation; and (b) Related Parties receive no Sales-Related Compensation…” – source file
In other words, a financial advisor claiming to be “fee-only” must not receive sales-related commissions directly or indirectly.
No. An insurance agent who receives a commission from an insurance agency or company for selling a variable or equity-linked annuity is not considered a “fee-only” advisor. Similarly, a Series 7 Registered Representative paid a sales commission by a Broker-Dealer for selling an investment does not meet the fee-only definition.
When seeking financial advice, look for fee-only fiduciary advisors with credentials like the CFP or CFA. Ask advisors to explain their compensation and incentives. Is your advisor compensated with commissions or other payouts on your investment transactions?
Final takeaway: Beware, “Fee-Based” is a misleading marketing term that means compensation by fees and commissions. Watch the video below for more on this.