One of the most significant decisions you can make is choosing the right financial advisor. The right advisor can appropriately allocate your assets for a more secure future. The wrong advisor can lead you down a path of second guessing and investments that may not be in keeping with your best interests. Taking the time to learn the differences that distinguish qualified investment professionals from commissioned salespeople will prove to be time well-spent for you and your assets.

The greatest dividing line that separates financial professionals is fiduciary obligation. By law, a fiduciary must act solely in the best interest of the client. As such, a fiduciary is obligated to reveal any potential conflict, as well as to fully disclose how they are compensated for their services. Doctors, lawyers, certified public accountants and fee-only Registered Investment Advisors (RIAs) are fiduciaries. In April 2005, the SEC set forth recent regulations that require brokers and other financial professionals to include the following to indicate an absence of fiduciary obligation:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interests. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

If you see this disclaimer, you should ask questions, request complete disclosures, and really question if this is the establishment that seeks to advance your best interests. After all, that’s why you hire a financial advisor in the first place, isn’t it?

How Does Your Advisor Get Paid?

The manner in which your advisor gets compensated speaks directly to the question of whose best interest is being served—yours or theirs. Essentially, there are three distinct compensation models for financial advisors:

Fee-Only Compensation: This model can minimize conflict of interest. A Fee-Only Advisor is paid for advice rendered and for ongoing management. No other compensation can be rendered by any other financial institution, thus advancing the fiduciary standard. Fee-only advisors are paid solely for their knowledge and their asset management services.

Fee-Based Compensation: Frequently confused with Fee-Only Advisors, but not at all the same, fee-based advisors may earn only part of their overall compensation from advisory fees paid by clients. They may also receive compensation for commission-based products they are licensed to sell, advancing an inherent conflict of interest. As such, fee-based advisors do not hold to a fiduciary obligation.

Commissioned Compensation: Commission-compensated advisors can face enormous conflict of interest. A financial benefit can only be derived through transactions, creating a bias toward account activity. Unbiased advice is an improbable outcome for investors who use the services of commissioned advisory services. Further complicating the conflict of interest issue, commissioned representatives can receive incentives for selling one investment over another.

Fiduciary Standard Requires Accountability

Fee-only Registered Investment Advisors are held to a higher standard than fee-based and commissioned advisors. Fiduciaries are governed by the Investment Advisors Act of 1940, which holds them to the obligation to act solely in each of their clients’ best interests, or face lawsuit for breach of fiduciary duty. Administered by the United Stated Securities and Exchange Commission, such a lawsuit can result in a permanent barring from practice within the securities industry, severe financial penalties and even criminal allegations resulting in possible prison time. In sum, fiduciaries are compelled to take their jobs very seriously.

Advisors who are affiliated with a broker/dealer are most likely not fiduciaries. Carefully read and understand the fine print that makes up the disclaimers on advertising materials offering services of a financial professional. You can most likely determine the presence of a fiduciary standard by doing so. The few minutes it takes to do so will surely reward you with peace of mind for years to come.

This information has been furnished to you by Index Funds Advisors, Inc., a fee-only Independent Financial Advisor registered with the United States Securities and Exchange Commission. Please see www.ifa.com/btp for complete sources, updates and disclosures.

DISCLAIMER: THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY OR COMPLETENESS OF ANY INFORMATION INCLUDED IN THIS DOCUMENT. Use of any information obtained from such addresses is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, effi cacy, and timeliness.