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Frequently Asked Questions

Please click the questions below to discover the answers.

What does being a fiduciary mean?

fi•du•ci•ar•y – A Financial Adviser held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the Financial Advisor is required to act with undivided loyalty to the client. This includes disclosure of how the Financial Advisor is to be compensated and any corresponding conflicts of interest.

Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor's financial interest. Investment Advisers must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors must adopt a Code of Ethics and fully disclose how they are compensated.

Unfortunately, only a small proportion of "financial advisors" are federally or state-registered Investment Advisors. Most so-called financial advisors are considered "Broker-Dealers" by the United States Securities and Exchange Commission (SEC). They are held to a lower standard of diligence on behalf of their clients. In fact, they are required by federal law to act in the best interest of their employer, not in the best interest of their clients.

Because broker-dealers are not necessarily acting in your best interest, the SEC requires them to add the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to dictate your financial security:

"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 interest. 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 this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest.

One of the best ways to judge if your financial advisor is held to a Fiduciary standard is to find out how he or she is compensated.

Fee-Only Compensation:

This model minimizes conflicts of interest. It is the required form of compensation for all members of NAPFA and is the one The GM Financial Group, LLC follows with clients. A Fee-Only financial advisor charges clients directly for his or her advice and/or ongoing management. No other financial reward is provided, directly or indirectly, by any other institution. Fee-Only financial advisors are selling only one thing: their knowledge and expertise.

Fee-Based Compensation:

This popular form of compensation is often confused with Fee-Only, but it is very different. Fee-Based advisors earn some of their compensation from fees paid by their client. But they may also receive compensation in the form of commissions or discounts from financial products they are licensed to sell. Furthermore, they are not required to inform their clients in detail how their compensation is accrued. The Fee-Based model creates many potential conflicts of interest, because the advisor's income is affected by the financial products that the client selects.

Commissions:

An advisor who is compensated solely through commissions faces immense conflicts of interest. This type of advisor is not paid unless a client buys (or sells) a financial product. A commission-based advisor earns money on each transaction and thus has a great incentive to encourage transactions that might not be in the interest of the client. Indeed, many commission-based advisors are well-trained and well-intentioned. But the inherent potential conflict is great.

NAPFA's Fiduciary Oath:

The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor.

The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client's purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client's business.

What the Fiduciary Oath means:

• I shall always act in good faith and with candor.

• I shall be proactive in my disclosure of any conflicts of interest that may impact a client.

• I shall not accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product.

Guy McPhail is a NAPFA-registered "fee-only" financial advisor, who acts as fiduciary to his clients.

Source: Focus on Fiduciary

What is a fee-only financial advisor?

NAPFA defines a Fee-Only planner as one who, in all circumstances, is compensated solely by the client, with neither the adviser nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. A NAPFA member or affiliate may not receive commissions, rebates, finder's fees, bonuses or any form of compensation from others as a result of a client's implementation of the individual's planning recommendations.

A financial planner who has a financial stake in the course of action that he/she recommends to a client faces an inherent conflict of interest and cannot be considered objective and unbiased. This is true even if the planner truly believes that he/she has only the best interests of the client at heart. Unfortunately, the vast majority of financial advisers in the United States are sellers of financial products. Some or all of their income may be dependent upon their ability to steer their clients to a limited number of the thousands of financial products available today. These advisers include stockbrokers, analysts, insurance agents, accountants and attorneys, as well as financial planners. Many of their clients are not aware of their advisers' dependence on selling products, or do not recognize its difference.

NAPFA believes that many of the problems that beset Americans today in their financial affairs – including the mismanagement of debt, failure to protect retirement assets and poor allocation of savings and investments – relate directly to the conflicts of interest that pervade the marketplace.

A NAPFA-Registered Financial Adviser is a financial planner who has earned the Certified Financial Planner designation, is a NAPFA recognized practitioner, Fee-Only, and who meets NAPFA's rigorous standards. We believe that, through our NAPFA-Registered Financial Adviser program, we have created the financial planning industry's clearest message about the level of responsibility and care that must be exercised on behalf of each client.

What is your investment minimum?

We do not have minimums for clients to engage us in financial planning or tax areas.

After an initial discovery meeting and leaning about the complexity of a client we will quote the client a fee fixed for the comprehensive financial plan.

If a client desires a service performed on a limited engagement basis we will do projects on an hourly fee and give the client an estimate of that upfront.

If a client would like to engage us for investment management our minimum is $250,000. In some cases we may waive that minimum.

All of our engagements will be in writing so the client has a clear understanding of any and all fees.

What is a holistic approach to financial planning?

NAPFA-Registered Financial Advisers provide holistic financial planning services to those they serve. Most of the nation's financial advisers pay lip service to holistic planning but few actually provide it. In recent years, the practice and public perception of financial planning tended to be overly focused on investments in general, and stocks in particular – a trend encouraged and reinforced by the fact that most providers of financial advice benefit from the sale of financial products.

As a result, many members of the public have received a painful reminder frequently forgotten: the value of investments can fall as well as rise. If they were relying on a financial adviser who was merely providing investment advice, they are probably surprised by and poorly prepared for the current economic downturn.

Why? If a financial adviser doesn't understand the client's full picture, the quality of advice in any one area, including investment advice, can suffer significantly. Competent and informed investment decisions must take into account all the other factors that comprise an investor's financial profile, including tax, estate planning, insurance, risk tolerance, specific family circumstances and ultimate financial goals. A financial plan built holistically includes much more than investment advice. It is an all-purpose tool that enables planner and client, working together, to make better financial decisions because each individual decision is made within the context of the full picture.

NAPFA-Registered Financial Advisers practice truly holistic financial planning to ensure their clients' entire financial picture is taken into account.

What is the difference between fee-only and fee based?

One of the best ways to judge if your financial adviser is held to a Fiduciary standard is to find out how he or she is compensated.

Fee-Only Compensation:

This model minimizes conflicts of interest. It is the required form of compensation for all members of NAPFA and is the one The GM Financial Group, LLC follows with clients. A Fee-Only financial adviser charges clients directly for his or her advice and/or ongoing management. No other financial reward is provided, directly or indirectly, by any other institution. Fee-Only financial advisers are selling only one thing: their knowledge and expertise.

Fee-Based Compensation:

This popular form of compensation is often confused with Fee-Only, but it is very different. Fee-Based advisers earn some of their compensation from fees paid by their client. But they may also receive compensation in the form of commissions or discounts from financial products they are licensed to sell. Furthermore, they are not required to inform their clients in detail how their compensation is accrued. The Fee-Based model creates many potential conflicts of interest, because the adviser's income is affected by the financial products that the client selects.

Commissions:

An adviser who is compensated solely through commission's faces immense conflicts of interest. This type of adviser is not paid unless a client buys (or sells) a financial product. A commission-based adviser earns money on each transaction—and thus has a great incentive to encourage transactions that might not be in the interest of the client. Indeed, many commission-based advisers are well-trained and well-intentioned. But the inherent potential conflict is great.

What is the difference between a RIA and a broker?

Federal and state law requires that Registered Investment Advisers are held to a Fiduciary Standard. This law requires that an adviser act solely in the best interest of the client, even if that interest is in conflict with the adviser's financial interest. Investment Advisers must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisers must adopt a Code of Ethics and fully disclose how they are compensated.

Unfortunately, only a small proportion of "financial advisers" are federally or state-registered Investment Advisers. Most so-called financial advisers are considered "Broker-Dealers" by the United States Securities and Exchange Commission (SEC). They are held to a lower standard of diligence on behalf of their clients. In fact, they are required by federal law to act in the best interest of their employer, not in the best interest of their clients.

Because broker-dealers are not necessarily acting in your best interest, the SEC requires them to add the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to dictate your financial security:

"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 interest. 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 this disclaimer appears in agreements you are signing, you should ask questions of your adviser. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest.

One of the best ways to judge if your financial adviser is held to a Fiduciary standard is to find out how he or she is compensated.