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How is this financial advisor paid for helping me?
The answers you collect in response to this simple, straightforward question are essential for choosing the financial advisor who is best for you. It is not always an easy question to ask, and the answer is not always clear. It can be awkward to foray into questions about the advisor’s business model, commissions, fees and other details, but how the advisor handles this conversation will clue you in to the advisor’s qualifications and communication style. Preparing for this conversation can help you clarify your own financial goals and the type of help you need to accomplish them.
“Fiduciary” and “suitability” are the two standards of advisors' accountability to clients. Fee structures pivot on one point: Who comes first when the advisor makes recommendations: you or the advisor?
In financial terminology, the type of responsibility an advisor has to clients is either fiduciary or suitability.
Investment advisors are bound to a fiduciary standard and has the highest level of accountability to you, the client. An investment advisor must make recommendations that are best for you, even if those recommendations result in less income for him or her. Here are three types of designations that financial advisors may hold that requires them to provide a fiduciary standard of care:
Financial advisors are paid by any of these three modes: an hourly fee, fees and commissions or a flat fee for assets under management. During an hourly fee business you pay much like paying an attorney. A flat fee for hours is negotiated and services are done within a time frame. In a fees and commissions relationship you will only be charged when purchases or sells are done in your account. This is good if you have a buy and hold strategy and do not intend on rebalancing your account often. The last, which is the flat fee for assets under management, is the model that Madrid Retirement Advisors focuses on. In this model you pay a flat fee for assets that are under management at the firm and nominal fees may apply. Our fee structure is listed below.
1.5% - Total account size: $0- $249,999 1.45%- Total account size between: $250,000-$499,999 1.40%- Total account size between: $500,000-$749,999 1.35%- Total account size between: $750,000- $999,999 1.30%- Total account size between: $1,000,000- $1,999,999 1.25%- Total account size above: $2,000,000
Suitability is a lower standard, and it means that the advisor must make recommendations that are appropriate for you, the client, at that time. Often, advisors operating under the suitability standard are commission-based. Broker-dealers only have to fulfill a suitability obligation, which is defined as making recommendations that are consistent with the best interests of the underlying customer. Instead of having to place his or her interests below that of the client, the suitability standard only details that the broker-dealer has to reasonably believe that any recommendations made are suitable for clients.
Many professional organizations offer training and certification in financial advisory skills, resulting in designations that sound nearly like the CFP. For example, the insurance industry offers a chartered financial consultant designation, which lets insurance agents earn a minimum level of competency in investment advisory. Quickly sort through the welter of certifications with the handy acronym decoder (http://www.finra.org/Investors/ToolsCalculators/ProfessionalDesignations/DesignationsLookup/) provided by the Financial Industry Regulatory Authority.