It seems like every professional financial journal that we peruse is referencing investors choosing to work with fee-only advisors who serve as fiduciaries to their clients. We asked Margaret McDowell, ChFC®, AIF® of Arbor Wealth Management about these distinctions.
Question: It seems that fee-only advisors who serve as fiduciaries to their clients are gaining more traction in the investment advisory industry. Why?
Answer: Investors are becoming more knowledgeable and sophisticated. Many investors who are interviewing potential advisors know prior to the meeting that they want a fee-only investment advisor who will serve as a fiduciary to them. Investors want an advisory relationship where their best interests are the advisor’s only concern. And savvyinvestors who are interviewing potential advisors often begin with the question, “Are you a fiduciary?”
Question: What is the difference between a fee-only and fee-based advisor?
Answer: A fee-only advisor accepts no commissions of any kind, from any source, and is compensated solely by his/her clients. For instance, a fee-based advisor can place client assets in a parent-company mutual fund and receive a sales commission, in addition to his/her management fee.
Another basic difference is that fee-only advisors do not sell products of any kind. A fee-based advisor or stockbroker may sell annuities, life insurance policies or other financial products that generate additional commissions.
Question: What does the term fiduciary actually mean?
Answer: The Latin root is fiduci. The term originated in the 1500s and grew to mean, over time, someone who held property or goods in a trustworthy manner for the owner. Attorneys, CPAs, physicians and fee-only investment advisors serve as fiduciaries in the modern era. A fee-only investment advisor is someone who is charged with a legal, moral and ethical obligation to act only in their client’s best interests.
Question: So some investment advisors are fiduciaries and some are not?
Answer: Correct. Fee-only advisors serve as a fiduciary to their clients. Fee-based advisors and stockbrokers do not. Stockbrokers and fee-based advisors can technically act as a fiduciary if they separate their practices into a hybrid model, one part fee-based and one part fee-only. How clients determine when the advisor is acting as a fee-only fiduciary and when the advisor is acting as a fee-based non-fiduciary is one confusing aspect of this model. The SEC is presently scrutinizing this approach, and has suggested that this business model presents multiple conflicts.
Question: Do fee-only advisors also face conflicts of interest?
Answer:Occasionally, such as when telling a client whether it is in their best interests to pay off a mortgage, which may mean fewer assets under management for the advisor. But the fee-only advisor must act in the client’s best interests and fully disclose any conflicts of interest.
Question: If fee-only advisors don’t sell products and don’t accept commissions, how do they get paid?
Answer: Most charge a fee based on the amount of assets a client has under management with the advisor. Usually, the larger the aggregate of assets, the lower the fee. Many firms also offer financial planning services as well.
Question: To sum up, why do you think the fee-only investment model is really taking off?
Answer: It puts clients and advisors on the same side of the table. What is good for the client is ultimately good for the advisors.
SEMINAR: Strategies for the Intelligent Investor
Margaret R. McDowell, ChFC®, AIF®, firm founder and principal of Arbor Wealth Management, will lead a presentation on intelligent, tactical strategies designed for current market conditions. McDowell has been interviewed by the Wall Street Journal, Reuters, Investment Advisor Magazine, Dow Jones Newswires, and Jane Bryant Quinn of AARP Magazine.
The seminar will be hosted in the Arbor Wealth Management Conference Room on Wednesday, Nov. 6, at 10 a.m. and again at 5 p.m. Please call 850-608-6121 to reserve space. Refreshments will be served. Arbor Wealth’s portfolio management and investment strategies are best suited for investors with $250,000 or more of investable assets (Arbor Wealth’s minimum new client asset level will increase to $500,000 as of Jan. 1, 2014).