Only a small percentage of financial advisors are Registered Investment Advisors (RIA). Federal and state law requires that RIAs are held to a fiduciary standard.
Most so-called “financial advisors” are considered broker-dealers and are held to a lower standard of diligence on behalf of their clients. One of the best ways to judge if your financial advisor is held to a Fiduciary standard is to find out how he or she is compensated. Check out this link to hire the best financial advisor.
Here are the most common compensation structures in the financial industry:
Fee-Only Compensation
This model minimizes conflicts of interest. A Fee-Only financial advisor charges clients directly for his or her advice and/or ongoing management. No other financial reward is provided, directly or indirectly, by any other institution.
Fee-Only financial advisors are selling only one thing: their knowledge. Some advisors charge an hourly rate, and others charge a flat fee or an annual retainer. Some charge an annual percentage, based on the assets they manage for you.
Fee-Based Compensation
This popular form of compensation is often confused with Fee-Only, but it is very different. Fee-Based advisors earn some of their compensation from fees paid by their clients. But they may also receive compensation in the form of commissions or discounts from financial products they are licensed to sell.
Furthermore, they are not required to inform their clients in detail how their compensation is accrued. The Fee-Based model creates many potential conflicts of interest because the advisor’s income is affected by the financial products that the client selects.
