The big divide down the middle separates the two very similar sounding terms “Fee based” and “Fee only”. Fee based means these advisors earn commission from what they sell you. This is such a mind boggling conflict of interest it pains me that it’s still so prevalent. These are often your “strip mall” financial advisors who say their advice is free, but whatever insurance product or mutual fund they sell you provides them a nice commission.
“Fee-Only” is a big step up. These advisors only get paid by charging you a fee directly, not collecting fees from other financial services companies. That sounds great (and is a huge improvement) but most of these advisors want to take all of your investments under their custody and charge you an annual percent of assets under management (AUM). For most, this AUM fee adds up to eye-watering numbers and incentivizes the advisor to keep your assets, not provide you financial advice.
Flat-fee and Advice-Only are the much better options. Here you pay a flat fee (hourly, monthly, or by the project) for the advice. Technically a “flat-fee” advisor could still take your assets under custody to manage them for you. Advice-Only advisors do just that: Provide advice for a fee, without commissions, sales pitches, or managing your assets.
What about CFP®?! This is actually just a designation that any advisor can earn by following the steps put forward by the non-profit CFP Board. In fact, it’s not even required to be a registered investment advisor to earn the CFP credential. Many fantastic advisors are CFPs. Unfortunately, I’ve also seen plenty of sleazy insurance salesmen with those letters after their names.
And what about fiduciary?! In theory it’s a legal duty by the advisor to work in your best interest, not theirs. In practice, it’s not entirely clear who is legally bound by this, almost all will SAY they are, but many are still tempted by their own commissions. So the idea is great, but it’s not especially helpful in practice.
If you need an advisor, I’d hire an Advice-Only advisor, like those on @hello_nectarine!
As always, reminding you to build wealth by following the two PFC rules!
-Jeremy
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