Art Haws, Guest Columnist for the Nashville Business Journal | August 214
How is your financial adviser compensated for the work that he or she does on your behalf?
Seems like an obvious question, but most people never ask and never fully understand the fee structure that can ultimately impact the long-term value of their investment portfolio. Communicating with your adviser up front is crucial to understanding not only how they are being paid, but also the prioritization they give you as their client.
Essentially there are two types of client accountability measurement in the financial service world: fiduciary and suitability.
A fiduciary adviser brings an elevated level of accountability to the client relationship. His or her job is to guide an investment portfolio based on the needs of a client in both the short- and the long-term. A fiduciary adviser sees value in a long-standing relationship that is not based on quick pay-outs or trendy investment strategies.
Fiduciary advisor designations include CFPs, CFAs and CPAs. These designations often reflect higher professional standards and commitment to long-term client relationships. These advisers have taken the time to seek out additional, specialized training and are often required to continue their education to ensure their relevance in a consistently changing investment landscape.
Fiduciary advisers are paid through hourly fees or through a structure where their compensation is tied directly to the performance of your portfolio. That can occur either through a pre-determined fee percentage or possibly through a performance-based fee arrangement.
A suitability adviser has no client obligation beyond any one investment at a given time. That means that he or she collects a commission based on the sale of a product, and has no requirement to advise you beyond that single transaction. Suitability advisers are selling products such as stocks, bonds, insurance, annuities and mutual funds.
Importantly, suitability advisers are held to the same ethical guidelines that fiduciary advisers must uphold. However, their model is based on generating revenue that is directly linked with the volume of products sold. So terms such as long-term strategy, diversification and proper asset allocation are not typically part of their vernacular.
In conclusion, the smart decision is the informed decision. If you are a hands-on investor, seek multiple investment products, monitor your activity consistently and look for new opportunities all of the time, then a mix of advisers — fiduciary and suitability — is probably a good idea. If you are more inclined to a relationship where two-way communication is important, investments are driven by long-term need and goals and you are leaning more heavily on the adviser to inform and drive your investment strategy, then you need a fiduciary advisor.
Most importantly, ask the question and understand the nature of the relationship before it begins.
Art Haws is CEO of Franklin-based HawsGoodwin FInancial.