Archive for January, 2009

You might have noticed there are a great many financial advisers who have decided to go independent lately. It is an interesting shift away from corporate America and the corruption associated with the financial industry.

Confusion and fear become prevalent in an economic downturn. Consumers search for investments that work or at the very least hold their value. Fee-only, independent and other niche marketing strategies and terms are meant to put the client at ease about the financial advisers’ potential conflict of interest. Unfortunately, the independence of a financial adviser is not a guarantee of ethical standards.

It is perhaps more important to be educated about fee structures and compensation arrangements. One size does not fit all, but there are options available for every situation. Here are three common compensation arrangements:

► Transaction (commission)-based investing: The financial adviser is compensated when an investment is bought or sold. This type of arrangement makes sense in a buy-and-hold strategy or a self-directed investment strategy. This arrangement is beneficial when the potential conflict of interest, such as transactions for the purpose of generating commission, is not present.

► Fee-only investing: The financial adviser manages investments for a fee or a percentage that is based on the value of assets under management. If the account value increases, so does the financial adviser’s compensation. If the account value drops, the financial adviser makes less. This type of arrangement makes sense for investment strategies that require the buying and selling of investments on a regular basis (no commissions are charged for transactions).

► Fee-only advice: The financial adviser provides comprehensive advice about personal finance. All asset management and investment strategies are implemented by an outside adviser. This type of arrangement is appropriate for clients who seek objective third-party advice or prefer to implement their own investment strategy.

Eliminate the fear and confusion by asking your adviser about their compensation arrangement. Each of these arrangements can be appropriate and ethical. It is not the independence of a financial adviser, but rather the transparency of fees and compensation that will better serve the consumer.