Choosing a financial adviser: How you pay is critical
Does your financial adviser always act only in your best interests? How she's paid can make a difference. Credit: Getty Images/pixelfit
It’s no small matter entrusting someone to manage your investments. Scrutinize the person almost as much as someone you marry. There are several considerations, but how you pay the adviser is critical.
Here’s why.
Financial advisers can be paid in several ways. Some receive commissions based on investment products they sell you. Others are fee-only, with some charging a flat fee and others charging a percentage of the assets they manage for you. And some are paid through a mix of fees and commissions.
Advisers follow different rules: “There are different regulatory constructs and potential conflicts of interest that can exist with advisers. Ask your adviser or prospective adviser if they are a fiduciary and always a fiduciary,” advises Max Haspel, managing director at The Colony Group in Babylon. A fiduciary is required to put your interests first. You may not want to work with someone who “sometimes” accepts commissions.
There are important distinctions. “It boils down to whether the adviser is financially incentivized to act in anything other than the client’s best interest. When there are third-party payments involved, the adviser may be swayed in their advice,” says Haspel.
Fee-only benefits: Brian Cohen, principal of Landmark Wealth Management in Melville, charges clients a percentage of assets under management. “We have a vested interest in the client doing well. When the market goes down (as does a client’s balance), our compensation goes down. When it goes up, we get a pay increase. This puts us on the same side of the table.”
There’s motivation to keep the relationship going. “We, like the client, have a long-term outlook. We don’t make money off the investments we choose, so the client never needs to wonder about a conflict of interest.”
