Finding the right advisor Part 2

Steve Merrell |

Finding the right financial advisor is not an easy task. Doing it well requires a combination of self-awareness (i.e., understanding what you really need from your advisor) and the ability to evaluate a potential advisor’s true expertise. Both are very difficult tasks for most people. However, understanding how different types of advisors work and get paid can help you narrow the field.

Some people just want recommendations on specific investments. They don’t feel a need for a lot of financial planning support or ongoing input into their financial decisions. For these people, a traditional broker might be perfectly suited to their needs. We discussed traditional brokers in last week’s column.

On the other hand, some people want more help. They may be busy in their own careers or interested in doing other things with their lives. They may find the financial world a strange place where people speak a foreign language. In any case, they see their financial advisor as someone who can help them define a workable financial plan and help them stick with their plan.

If this sounds like you, you will probably find more success working with an advisor that is either “fee-only” or “fee-based.” Though both names sound similar, these two types of advisors are vastly different. This week, I will describe how these advisors work and explain why I prefer the fee-only approach.

Fee-based advisors have two sources of revenues: management fees paid by clients and other revenues like commissions from selling financial products. The combined revenue streams can make fee-based advisory businesses highly lucrative which is why so many advisors are attracted to this model.

However, the commission element for fee-based advisors creates the same conflicts of interest that brokers face. Personally, I have never liked the idea of an advisor charging a fee and earning a commission. It seems strange to me that anyone would rely on financial planning advice that is potentially tainted by the incentive to sell a financial product. I imagine that is why governing board of the CFP Institute, the organization that accredits Certified Financial Planner ® professionals, recently changed their rules to require all CFP certificate holders to be fiduciaries. I’m not saying that all fee-based advisors are compromised, but you need to be careful.

If you want to avoid the potential conflict of interest related to commissions, you need to look for a fee-only advisor. Fee-only advisors are paid directly by their clients for the services they receive. They receive no payments from third parties. Fees can be structured in several different ways, including a flat dollar amount, an hourly rate or as a percentage of assets under management.

Note that fee-only advisors are fiduciaries while brokers and fee-based advisors are not. Being a fiduciary means the advisor has the legal obligation to put the client’s interest first. There have been serious efforts in recent years to make all financial advisors fiduciaries, but that seems incongruent to me. If an advisor gets paid a commission to sell a certain product, then no matter what you label it, that advisor is an agent of the company paying the commission, not the client and, by definition, she cannot be a fiduciary to her client. Trying to make it otherwise results in twisted logic.

Before you hire an advisor, do some homework to understand how your advisor gets paid and what fees you might be subject to. The first step is look up your advisor’s Form ADV. This is an annual filing your advisor is required to make with the U.S. Securities & Exchange Commission. It goes into detail about how the business is managed, what kind of advice they provide and how they charge for their services. It will also disclose any past disciplinary actions against the firm or individual advisors at the firm. You can find the ADV at

After you have reviewed the ADV, have a candid conversation with your potential advisor. It is perfectly okay to ask him to review his business model with you, including how much of his business revenue comes from fees versus commissions. You should also make sure you understand what you should expect in terms of reports, frequency of reports and financial planning.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to