2 Crucial Questions to Ask When Interviewing a Financial Advisor
The two most important questions to ask a financial advisor: their compensation model and business structure. Learn the difference between fee-only, fee-based, and commission-based advisors.
The 2 Crucial Questions
- What is your compensation model?
- Under what type of business structure do you operate?
Types of Business Structures
Broker Dealers
Typically larger companies or banks like TIAA, UBS, JP Morgan, Ameriprise, Northwestern Mutual, Goldman Sachs. In this model, the company creates incentive structures that impact the advice given to you. Advisors often push proprietary products that may not be the best fit, and may incur higher fees. Some clients don't realize they're paying over 2% per quarter on portfolios—costing upwards of $20,000 per year on a $1 million portfolio. Some products carry front load fees of up to 5%, meaning $50,000 on a million-dollar portfolio.
Registered Investment Advisor (RIA) Firms
Usually smaller firms without their own investment products. RIAs are typically better, but some still push products for broker dealers through partnerships—which is where compensation models become critical.
Types of Compensation Models
Commission-Based Financial Advisors
Income is directly tied to product sales. This leads to significant conflicts of interest: recommending unnecessary transactions, prioritizing short-term transactional relationships, and selling the highest-fee products for higher commissions.
Fee-Based Financial Advisors
A hybrid model receiving both client fees and product commissions. Don't confuse "fee-based" with "fee-only"—they are very different. Fee-based advisors are held to a "suitability" standard, meaning products must be suitable but don't need to be the best possible investment.
Fee-Only Financial Advisors
Compensated exclusively by clients. Never earn commissions from selling products. Held to the Fiduciary Standard—legally required to put your interests first. All recommendations must be what's best for you. Fee-only advisors typically avoid high-fee investments because there are almost zero scenarios warranting them.
How to Confirm Your Advisor is Fee-Only
- Check the Firm's ADV: This compliance document explicitly lists whether an advisor is fee-based or fee-only.
- Check Fee-Only Portals: Sites like NAPFA, Garrett Planning Network, and XYPN require fee-only membership.
- Ask the Advisor: Anything other than a direct response should be considered a red flag.
At United Financial Planning Group, we pride ourselves on our fee-only structure that fosters trust and aligns our success with yours. Contact us today to learn more about our financial planning services.