Many servicemembers and their families prefer an advisor who is familiar with military pay and veteran benefits. This makes sense to us. An advisor who understands SBP, TSP, SGLI, VGLI, BRS, MSSRA, BAH, VA disability ratings, etc. can get to work helping you achieve your financial goals much faster than an advisor who needs to research these benefits specific to military families. Ultimately you need to decide for yourself the skills you want your advisor to bring to the engagement.
The term “financial advisor” is unregulated, so it can be used by nearly anyone to describe their work in financial services. (See more below in “How are financial advisors paid?”) At MFAA, we believe the following traits define a true advisor, as opposed to primarily or solely a salesperson:
- Compensated only by you
- Is committed to providing not just investment advice, but also making sure that advice serves your broader financial plan
- Will proactively disclose any conflicts of interest and resolve them in your favor
- Will tell you if you don’t need an advisor or if you’re better served elsewhere
Maybe not. Two generations ago, you needed a broker just to place trades for you. Without one, you had little or no access to markets that can help you grow and preserve wealth. The microchip changed all that. You can place your own trades, often at no cost, at Vanguard, Fidelity or Schwab, to name just a few platforms. If this is all you want—or if you think this is all an advisor will do—you might be better off just putting in the time and doing it yourself.
The knowledge and service described above used to be the sum total of service available from your advisor. Now it describes only basic proficiency. At MFAA, we believe a real financial advisor in the 21st century should be the financial version of a Sherpa—a trusted guide who understands the terrain between where you are and where you want to be, can help you manage the risks that might impede your progress, and can help you carry your pack. We believe an advisor asks you better questions, to help you understand and manage your money biases. We believe this kind of service ought to be available to everyone who wants it, without any sort of asset minimum that “qualifies” you for it. And we believe the value of the service should stand on its own, without some glossy slogan that tells you only a portion of the truth.
There are three basic models for how financial advisors are compensated:
Commission
Commissioned financial advisors are paid when they make a sale of specific investment or insurance products. The amount of the commission is typically based on the type of product sold and the amount of money that the client puts into the financial product. Some examples of financial products often sold for commissions are annuities, life insurance, and mutual funds. This group would include people like stockbrokers and insurance agents. Any financial advice that they give to clients is deemed to be “solely incidental” to the sale of the product, and the salesperson is held to a fairly low legal standard called “suitability” to ensure that the products are not egregiously inappropriate for the client’s specific financial situation.
Commissioned advisors are not usually required to disclose to clients the amounts of the commissions that they receive or to describe any conflicts of interest that may exist. This means that they may be selling financial products which are best for them, and not for you. This model is the most predominant of the three options by a large margin. That is starting to change, however, because of greater consumer awareness and regulatory scrutiny.
Fee-only
Fee-only financial planners are paid directly by the client for the advice that they give, and do not receive compensation from any other third-party agreements. This ensures their objectivity, and that they are incentivized to act in the best interest of their clients rather than their employer. Nearly all fee-only financial planners are subject to a strict fiduciary standard, which imposes both ethical and legal obligations to put their clients before themselves.
Fee-based
Fee-based financial advisors are a hybrid of the other two options. They often charge clients fees for investment management or financial planning, but also still receive commissions for selling products such as insurance policies or variable annuities. Similar to commissioned financial advisors, they are not usually required to disclose the amounts of commissions or other conflicts of interest.
There are a few different ways that fee-only financial planners charge their clients:
- Hourly – Similar to how you might pay your accountant or attorney, many fee-only financial advisors simply charge by the hour for services provided to clients. This model is more common for limited projects of a defined scope than it is for ongoing financial planning services.
- Assets Under Management (“AUM”) – More commonly for investment managers, they may charge clients a percentage of the investment portfolio that they manage. A fee of 1% per year is a common benchmark, though there are a wide range of options depending on the advisor and the types of services that they include. Fees will often decrease to lower percentages for larger accounts.
- Flat – A simple, pre-defined amount that the client pays for either a project or for ongoing advice. Some advisors charge every client the same amount, some may vary the fee based on the complexity of the client or the client’s net worth or income.
“It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”
– Upton Sinclair
There’s a lot of confusion and misinformation out there about how financial planners are paid for the services that they provide. Compensation models are more important in the financial planning industry than in many other fields, because the structure used can have a significant impact on the objectivity and quality of the financial advice given to clients.
Would you rather visit a doctor who is paid to assess your medical situation and give professional advice based on what he’s learned in medical school and from treating patients over the years, or visit a doctor who is paid by the pharmaceutical companies whose drugs he sells? Consider applying this same framework when selecting a financial planner to work with. There’s nothing necessarily wrong with receiving commissions for a sale, but problems do arise when receiving advice from salespeople trying to make a sale.
Contrary to popular belief, most financial advisors are not legally required to act in the best interests of their clients. They are permitted to sell financial products and give recommendations that make the most money for themselves or their firm. A fiduciary financial advisor cannot engage in such practices. A fiduciary financial advisor is legally and professionally bound to provide advice that puts the clients best interests first. All MFAA advisors are required to sign a fiduciary oath before joining.
Most financial planners work within a corporate environment for massive broker-dealers or insurance companies. Within those structures, the best interests of the client can sometimes come second to the firm’s desire to maximize profit. Public shareholders, a corporate board of directors, and multiple levels of managers all add layers of influence that may detract from an advisor’s ability to provide conflict-free advice that puts clients first. Members of the Military Financial Advisors Association all work for (or own) independent firms in order to be free of such complications.
Focus on clients, not corporate employer
As independent financial advisors, we work for our clients rather than for a corporate entity. Our loyalty is to our clients, and we adhere to a strict fiduciary standard while serving them. We have no pressure from managers or sales quotas to distract us from our primary responsibility to take care of clients, and are incentivized to keep our clients for the long term by providing excellent service.
These are all financial credentials.
CFP® stands for Certified Financial Planner. It is widely considered to be the standard for financial planning professionals. Obtaining the right to display the CFP® marks requires years of study, testing, and experience in the field. All MFAA members are required to either hold the CFP® designation or be a candidate in good standing with the CFP Board of Standards.
AFC® stands for Accredited Financial Counselor. It is another widely respected credential in the financial planning profession. An AFC® is a solid choice to help focus families on paying down debts, changing bad money habits, and working through financial security on the path to prosperity.
EA stands for Enrolled Agent. It is a tax credential awarded and regulated by the US Department of the Treasury to individuals who demonstrate expertise in US tax law. Enrolled Agents are federally licensed to represent taxpayers at all levels of the IRS, including Appeals.
FFC® stands for Financial Fitness Coach. It is awarded to individuals who develop and demonstrate skill at assisting clients in making lasting financial behavior changes. If you can’t seem to get out of your own way when it comes to financial success, an FFC® might be for you.
We are happy to provide mentoring to military service members and veterans thinking about a career in financial advising. Read through the bios of the members and find one with whom you would like to work. Contact them through their respective website and see if they would be a good fit. (We plan a better process for this in the future, but we aren’t quite there yet!)
We are in the process of evaluating new membership. In the meantime, if you ‘re interested let us know by contacting one of us on the XYPN Forums to express interest. (XYPN Membership is part of our screening criteria, so contact us there so we know you’re already a member.)