March 2, 2017

Picking a Financial Advisor? Ask Them “How Are You Compensated?”

by Chris Mullis, Ph.D.

Asking the right questions is critical to finding a high-quality financial advisor that you can trust. One of the most important questions that you can ask is:

  • How are you compensated?

Note that the exact wording is crucial. We did not ask, “How do I pay you?” or “What am I charged as a client?”. Use these limited questions and you might not get the complete picture or identify potential conflicts of interest.

For example, many financial advisors’ compensation include:

  • bonuses for meeting sales goals
  • spots on “educational” trips
  • direct compensation for selling you certain products

Here are some great follow-up questions:

  • Do you get paid or win anything based on the products you recommend to me?
  • Do you receive compensation for our relationship from anybody other than me?

An independent advisor’s fee usually differs from the fees assessed by the brokers that work for the banks/brokerage houses. Broker’s fees are typically based on commissions for the trades and products (mutual funds and insurance products) “sold” to their clients. This conflict of interest between the broker’s objectives and those of the client results in non-transparent and substantially higher client fees.

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