Client Perspectives

NAPFA Releases Tips On Reducing Costs That Can Drain Retirement Savings

Do your clients understand your fees?

CHICAGO, June 16, 2017 /PRNewswire/ — Media coverage of the Department of Labor’s fiduciary rule has heightened consumer awareness about how financial advisors are paid, but reliable information on this topic is in short supply.

The National Association of Personal Financial Advisors today released tips to help consumers better understand financial advisor compensation and common product fees that can impact their financial goals.

Nearly 60 percent of investors do not completely understand the fees they pay their financial advisor, according to J.D. Power. NerdWallet research found that a millennial with the option of investing in either of two commonly held funds can save nearly $215,000 by choosing the one with fees that are 0.93% lower.

“The new fiduciary rule is a big step in the right direction, but consumers need to be aware that the rule applies to a limited number of pre-tax retirement accounts,” said NAPFA CEO Geoffrey Brown. “The best strategy for avoiding high-cost fees and commissions is to work with a financial advisor with transparent compensation and dedication to a fiduciary standard of care.”

The DOL fiduciary rule, portions of which took effect on June 9, requires financial professionals to put clients’ interests ahead of their own regarding advice on pre-tax retirement accounts.

Tip #1: Understand financial advisor compensation methods

Three basic types of compensation methods are:

A Fee-Only financial advisor charges the client directly for advice. The advisor does not receive commissions on actions taken on a client’s behalf. Compensation is based on an hourly rate, a percent of assets managed, a flat fee or a retainer. All NAPFA members are Fee-Only financial advisors and fiduciaries working in the client’s best interest.

Commission and Fee
Commission and Fee advisors charge clients a fee for advice delivered and can also receive payments for products sold or recommended. Any outside compensation from commissions lessens the advisor’s ability to put the client’s best interest first.

Commission Only
An advisor who is compensated through commissions makes money if a client buys a product the advisor sells. Commission-based advisors may receive higher commissions on certain products, which may influence their decision to recommend investment products that are not in a client’s best interest.

More information is available through NAPFA’s Tough Questions to Ask Your Advisor and Financial Advisor Checklist.

Tip #2: Be aware of common product fees

Examples include:

12b(1) Fee
Annual marketing or distribution fee associated with mutual funds.
Surrender Charge: Amount deducted from the balance in your annuity policy or insurance contract if the policy is cashed in or surrendered early.

Back-End Fee
Amount deducted from the balance in your investment if the investment is sold early. Often associated with selling mutual fund shares.

Wrap Fee
Comprehensive charge from an investment manager for providing services, including investment advice, investment research or brokerage services.

More information is available through NAPFA’s Compensation and Fee Declaration document.

You're hiring the advisor to fulfill your goals— either they're meeting your needs and living up to the high standards you're setting, or they aren't

Tip #3: Stay informed

Review account statements to be sure you’re being charged correctly. If you’re uncertain about specific fees, ask about what you’ve been charged and why.

If you’re not happy with the fees you’re paying, shop around. Use NAPFA’s Find an Advisor tool or the SEC’s Investment Adviser Public Disclosure website to research options.

Monitor your advisor throughout the relationship. You’re hiring the advisor to fulfill your goals— either they’re meeting your needs and living up to the high standards you’re setting, or they aren’t. NAPFA’s Pursuit of a Financial Advisor Field Guide has tips on evaluating your advisor annually.

Excerpts from ‘Tough Questions to Ask Your Advisor’

Being armed with the right questions is vital in understanding an advisor’s motivations and whether or not they are going to work in your best interests. Here are some questions to get you started!

  • Does any member of your firm act as a general
    partner, participate in, or receive compensation
    from investments you may recommend to me?
  • Do you receive referral fees from attorney,
    accountants, insurance professionals, mortgage
    brokers, or others?
  • Do you receive on-going income from any mutual
    funds that you recommend in the form of 12b(1)
    fees, trailing commissions, or other continuing
  • Do you take custody of, or have access to my assets?
    if you were to provide me on-going investment
    advisory services, do you require “discretionary”
    trading authority over my investment account?

Read the entire questionnaire ‘Tough Questions to Ask Your Advisor’ here.



SOURCE National Association of Personal Financial Advisors (NAPFA)