For years now, the financial press has been writing about the conflict between the forces of good (the fee-only adviser) and the forces of evil (the commission-based broker).
Do fee-only advisers have a monopoly on always acting purely in the client's best interest? Does a commission-based approach mean that the adviser is only trying to steer clients to products that pay the largest commissions? The answer, as in most absolute black-and-white scenarios, is no.
It is not necessarily about how you are charged, it is about whether you are being charged fairly. Fairness is not about the amount of fees; instead, it is about transparency and value.
When it comes to accumulating and preserving our wealth, we all want unbiased advice; however, there is simply no such thing. Everyone has some sort of self-interest and, therefore, some sort of bias.
Take the advice you get from your doctor. Doctors have biases based on their specialization, how they bill and their philosophy regarding medicine — and yet, when receiving a health diagnosis, a patient often will focus more on treatment and results than the biases that brought the doctor to their recommended treatment.
So, given that it is impossible to avoid bias, how do we distinguish between good and bad charges for financial advice? The answer has less to do with fee structure than most assume.
ASK THE RIGHT QUESTIONS
As the client, it is important to understand any bias that might exist and decide how it might influence your adviser's decision-making process. As a consumer, in any circumstance, it's incumbent upon you to ask the right questions in order to discern how these professionals get paid so you can view any advice that they give in the context of their motivations.
For example, if your estate-planning attorney is being paid by the hour, then you need to understand that when he or she recommends a complex solution that requires the drafting of a number of carefully crafted documents, there may be a simpler strategy that may suffice for your needs. The opposite may also be true — the simpler solution may not be enough for your needs. Trust, but verify, as the saying goes.
KNOW WHAT YOU'RE PAYING
While you certainly should know the manner in which your financial adviser or any other professional service provider is compensated, their own integrity, fairness and transparency are the real measures of their intrinsic value.
There are a multitude of dedicated firms that serve as staunch advocates for their clients. And they come in all shapes and sizes — from commission brokers to fee-only advisers and hybrid firms that combine fee-based investment advisory services with comprehensive wealth management and
estate planning that occasionally involves commission-based insurance products. What truly distinguishes these firms, however, is their willingness to be forthcoming and straight-forward in disclosing how they are compensated.
Ultimately, deciding with whom you choose to work should be based on the strength of that financial adviser's character and their track-record of serving clients well over time. You also want to ask yourself whether or not each recommendation they're making is intended to move your agenda forward. Are they presenting the pros and cons of the given strategy, as well as fully disclosing their compensation method on that business? If the answer is yes, then your likelihood of achieving financial success could be much higher.
Thomas Mingone is managing partner at Capital Management Group of New York.
