A Fiduciary is a professional who adheres to the Fiduciary Standard. Everyone else may act under the Suitability Standard.
Under the Fiduciary Standard, Fiduciaries:
- Are legally and ethically bound to act in your best interest.
- Only give advice and recommendations in your best interest, even if it pays them less.
- Get paid a transparent fee instead of hidden commissions.
Under the Suitability Standard, Professionals:
- May act in their own best interest.
- May recommend products that are worse for you but pay them more as long as they are “suitable” for you.
- May get paid large hidden commissions to recommend expensive products.
There are two primary ways Financial Professionals get paid (click each to see more):
Financial company representatives get paid a commission to sell you financial products. Often, the worse the product is for you, the more it pays the professional. Below are the typical products and up-front commissions sold by non-fiduciaries.
- A-Share Mutual Funds: Up to 5.75% of money invested.
- Contributing $50,000 will pay the professional a $2,875 commission, and only $47,125 will get invested.
- Mutual Funds also have high ongoing expenses.
- Permanent Life Insurance: 50-100% of the annual premium.
- Buying a Policy that is $500 per month may pay the professional a $6,000 commission.
- The cash-value performance is often negative for 20-30 years.
- Annuities: 3-10% of the amount invested (7% is most common).
- Putting $300,000 into an annuity will pay the professional a $21,000 commission.
- Annuities lock up your money for 7-10 years.
Under the suitability standard, none of these products need to be in your best interest. They do not need to disclose their commission to you.
Advisors and planners get paid a transparent fee for planning and advice in your best interest. Below are the two most common.
- Financial Planning Fee: A transparent out-of-pocket fee for planning across all areas of finance.
- May be paid upfront or monthly.
- All advice given under a financial planning fee must be in your best interest.
- You decide if you believe the value of the advice is worth more than the fee.
- Investment Advisory Fee: A transparent percentage of assets charged quarterly.
- Each quarter you decide if the value of the advice you are getting is worth more than the fee.
- You can leave any time without penalty or additional fees.
- Tax Preparation looks backward and compiles and files tax forms to save taxes for one year.
- Tax Strategy looks forward to determining how to save taxes over your lifetime.
- Tax Advice does both by incorporating preparation and strategy. Those who are licensed to give tax advice and have long-term retirement planning expertise are rare.