Many consumers are interested in having a fee-only financial planner, but they don’t know how to tell if the advisor they are considering is actually fee-only. If you think how your advisor is compensated matters, read on.
Financial advisors can say that they are “fee-based” or imply that they are fee-only fiduciaries without actually being fee-only. In the United States is it very confusing. One way to be sure is to make sure that they are a NAPFA-Registered Advisor. Go to napfa.org to find a NAPFA Advisor in your area.
Another way is to look up your advisor’s online SEC registration. Here’s how:
Step 1: Go to the Division of Investment Management: Electronic Filing for Investment Advisers on IARD. Click on “Adviser Info on IAPD”:
Step 2: Click on the “Investment Adviser Search”:
Step 3: Choose either “Individual” or “Firm”, Enter their name and Zip Code, Keep the search tight, e.g. withing 5 miles, and click “Start Search”:
Step4: Find your investment advisor and click on their “Investment Adviser Firm” link. Firms are listed both under their incorporation name as well as any names under which they are doing business. For example, we are incorporated as “Marotta Asset Management” but changed our business name to emphasize the fact that in addition to our core service of asset management we also do comprehensive wealth management:
Step 5: Your advisor will either be registered at the state level or with the SEC. Currently, firms with over $100 million in assets under management are required to register with the SEC. Click on the appropriate link to get to their registration:
Step 6: The Advisor’s SEC ADV filing will be displayed. You can find Compensation Arrangements under “Item 5 Information About Your Advisory Business.” You can also click on “View All” to see your advisor’s answers to every question.
Step 7: The compensation information is specifically under “Part 1A Item 5 Part E” which is entitled “Compensation Arrangements.” Be sure that (5) Commissions is not checked. If “(5) Commissions” is checked, your advisor is not a fee-only financial planner.
It is always possible that a financial advisor answers incorrectly to the SEC. I’ve seen more than one commission-based financial advisors who failed to check “(5) Commissions” either by accident or on purpose. Sometimes they think, mistakenly, that incorporating the commission based side of their practice separately means they can avoid checking “(5) Commissions” on the firm which only charges the client. It just goes to show that you can’t regulate crooks.
Learn more about why we think being a fee-only fiduciary matters: “Fee-Only Financial Planner: What’s the Difference?” and “Ten Questions to Ask a Financial Advisor.”