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Financial Advisors: Which Type is Best for You

November 17th, 2007 at 08:39 pm

You recognize that you need help with financial planning and advice on the investments required to meet your financial goals. How do you find an advisor that is right for you?

The way an advisor is compensated can influence the advice that they provide. Let’s look at compensation methods for financial advisors.

Commissioned based advisors – These advisors typically sell both insurance based financial products and load mutual funds. They will often state that their financial planning services are “free” and that you will pay no commissions, as long as you hold the product for a period of five years or more. Always ask the advisor what they will receive in commissions for each product you are offered. Once you know what their commissions are, you know how much you are really paying for their advice.

Fee based brokerage advisors – To join the popular trend of charging fees instead of commissions, brokerage firms are offering “fee based” accounts. You pay an annual fee, based on a percentage of the assets in the account. For this fee, you may make unlimited trades without paying any brokerage commissions. Commissions on mutual funds (such as the 12-b1 annual load) and certain proprietary products may also compensate the broker.

Fee only assets based advisors – These advisors provided professional asset management and financial advice and typically offer products that pay no commissions. Their compensation is based on an annual percentage of the assets that you place with them to manage.

Fee only financial planners – Fee only financial planners provide financial planning and investment advice for an hourly fee and/or retainer. They sell no products and receive no commissions. Since they are advising you on all of your financial resources, there is no incentive to have assets under management.

On the surface, advisors that sell commissioned-based products appear to charge less than fee only advisors. However, when you “look behind the curtain,” you will often find that the commissions paid are more than you would pay for fee only based advice.

To demonstrate this, ask a commissioned based financial advisor about variable annuities. Then compare their product with a similar product from Schwab, Fidelity or Vanguard (all non-commissioned brokers). You will always pay more for the variable annuity from a commissioned broker than you do from a non-commissioned brokerage firm.

Financial advisors are legally required to tell you how they are compensated. Always ask how they will be compensated for financial advice provided. Once you know how they are compensated, you can determine if any conflicts of interest might arise. With this knowledge, you can make an informed decision on the type of financial advisor that is best for you.

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