Contrary to popular belief, most financial advisors are not legally required to disclose any conflicts of interest. Commissioned financial planners can potentially abuse and defraud unsuspecting clients. Working with a fee-only financial planner ensures that the advice you are receiving is objective, so you can be confident that their recommendations are well-founded.
Which seems like the better option to you: visiting a doctor that is paid to assess your medical situation objectively based on his education, or seeing a doctor who is incentivized to sell you drugs offered by a pharmaceutical company that pays his salary? Apply this same framework when selecting a financial planner. There is always a risk in taking advice from salesmen looking to fatten their commissions.
Unfortunately, a substantial majority of the financial advice industry still operates on a commission model that provides advisors higher compensation for making recommendations to buy specific investment or insurance products. This represents a massive conflict of interest, and may reduce your confidence that you’re acting in your best interest rather than their own. When selecting a financial advisor to work with, look for signs that they do everything possible to put clients before themselves.
First, ask if they are subject to fiduciary standard at all times. Being a fiduciary means that they have both an ethical and legal obligation to always up the best interests of their clients before themselves. It seems obvious to most people that advisors should be required to put their clients first, but that is unfortunately not the current landscape that consumers face. Most financial advisors are subject to a lower standard called “suitability”, and there are others who are only required to act as a fiduciary for certain aspects of their relationship with clients. Ask if they are willing to sign a fiduciary oath, or if they are members of organizations that require strict adherence to a fiduciary oath.
Second, ask if they are fee-only. Being a fee-only financial planner means they are compensated solely by their clients, and not through commissions from financial products that they recommend. Be aware that if someone says they are “fee-based,” tat means they receive both fees and commission.