When we meet with prospective clients, the question of how we charge for our service always comes up. While our answer is simple and straightforward (we charge a fee based on the total assets we advise on), we frequently find ourselves having a broader conversation about how we, and others in our industry, are compensated. And, based on this week's Wall Street Journal article,  The Fiduciary Rule Is Dead. What's an Investor to Do Now? our prospective clients are not alone in wondering what exactly they're paying for.

Paying for Advice

According to research and analytics firm, Cerrulli and Associates, in their most recent survey of 8,000 investors, 43% either believe their service is "free" or they aren't sure how their advisor is compensated.

We can say with certainty, no one is getting their financial advice for free!

Asset management firms, custodian banks, industry providers and client-facing advisors have long entered into partnerships and you scratch-my-back and I'll-scratch-yours financial arrangements that may or may not benefit the client. Sometimes, these arrangements allow a client to get advice without having to pay a separate out of pocket fee. But they're probably still paying in the form of unseen commissions, bond mark ups, loads, revenue sharing, or simply investing in products that aren't in their best interest.

Although regulation of our industry is currently in flux (after the recent repeal of the Obama-era Fiduciary Rule), and although different types of advisors are held to different standards, working with an investment professional doesn't have to be confusing - if you know what to look for.

The "F" Word

It's important to know that financial advisors who are regulated by the Securities and Exchange Commission (SEC) are held to the fiduciary standard. That means, advisors must put client interests before their own. Brokers on the other hand, are regulated by the Financial Industry Regulatory Authority (FINRA) and are held to the suitability standard. That means advice and product recommendations must be suitable for the client (but just because something is suitable doesn't necessarily mean it's the best). Some financial pros fall into both categories at the same time. To find out if your advisor is registered with the SEC, is a member of FINRA, or both, search BrokerCheck, a database maintained by FINRA. An individual's profile will denote his or her title and regulatory overseer. Moreover, ask about that "F" word - Fiduciary; will your advisor act as a fiduciary on your behalf? Will they state that in writing?

Investment Choices

The type of advice you get can be impacted by which regulator oversees your advisor. Similarly, the firm where your advisor works, can impact the investment choices available to you. Advisers who are held to a fiduciary standard must choose products that are in your best interest. But what products an advisor can pick from varies from firm to firm. Some firms have house funds and lucrative partnerships with fund companies, and their brokers have more limited menus of investment options from which to choose. Advisors from independent firms may have the entire universe of products (including low cost index funds) from which to choose. How will you know if your advisor is subject to product incentives or constraints? Check their disclosures. Advisory firms regulated by the SEC have to spell out conflicts of interests in their ADV disclosure forms. 

Finally, for those of you wondering, New Market Wealth Management is a Registered Investment Advisor, regulated by the SEC. We are a fiduciary and willingly state so in writing for our clients. We are an independent firm, free to recommend any investment we believe will deliver the best results for our clients. But whether you decide to hire us or not, we urge our readers to demand an independent, fiduciary level of care for something as important as your financial future.