In the financial services industry there are different types of financial advisors with different regulators and different compensation structures. Financial advisors or planners are typically regulated by the SEC, FINRA and/or the state insurance commissioner. Those regulated by the SEC can charge fees while FINRA and insurance licensed advisors are paid via commissions. Some advisors are licensed with more than one regulator and may charge fees in addition to earning commissions.
Consumers should learn how their advisor is compensated before following their advice. Advisors that can earn commissions can earn higher commission rates by selling some financial products over others, thus they often are faced with a conflict of interest in dealing with their clients. These clients should be aware of the conflict and ask why the advisor is recommending a particular investment. In dealing with these salespeople the client is best served by the Latin phrase “caveat emptor” or buyer beware.
Financial advisors generally fall into one of three categories when it comes to compensation; fee only, fee and commission (sometimes dubiously referred to as “fee based”), and commission only. Fee Only advisors are paid directly by the client and their fees are easily understood and transparent. They don’t receive any compensation from the products they recommend. On the commission side some commissions are clearly spelled out but many are complicated and hidden. At Vintage we work on a Fee Only basis with our fee easily understood and clearly communicated every quarter.
We did some research to determine the breakdown of financial advisors in the Ann Arbor area. Overall there were 421 financial advisors that are regulated by the SEC, FINRA or both. Of those, just 30 fall into the client-friendly Fee Only category. About 64% charge fees and commissions while the remaining 29% work strictly on commission.
In addition to licensing requirements some financial planners earn the Certified Financial Planner designation or CFP®. This mark requires the completion of several courses in financial planning, three years industry experience, passage of a two-day exam, and continuing education requirements. In the Ann Arbor area there are only 46 CFPs, just 11% of the total number of financial advisors. Of the 46, just 18 work on a Fee Only basis.