Fiduciary

A fiduciary is an individual or organization that has a legal duty to act in the best financial interests of someone else, placing the client’s financial welfare above their own. Ask any prospective service provider if they're a fiduciary, and verify their regulatory and professional status. Fiduciary duties depend on the profession and any regulations surrounding the role. For example, board members may have certain fiduciary duties to the companies that they advise. Trustees owe fiduciary duties when they manage assets for their beneficiaries.

Fee-Only vs. Fee-Based

Fee-only advisors are compensated solely by client fees. A fee-based financial planner is paid by the client but may also receive commissions from other companies for selling certain financial products. This can create a conflict of interest, because a fee-based advisor may charge you for advice while potentially steering you toward investment products that personally benefit them. Choosing a fee-only financial planner who follows the fiduciary standard is usually a better choice for most investors. Several professional groups require members to abide by the fiduciary standard, including The National Association of Personal Financial Advisors, Garrett Planning Network, XY Planning Network and the Alliance of Comprehensive Planners.

Form ADV

Form ADV (“the Uniform Application for Investment Advisor Registration”) is one of the most important documents to check if you’re going to hire an investment adviser (or already have one). This free disclosure document reveals everything from information about an advisor’s fee structure and firm history to their management style and any misconduct. If an investment advisor receives compensation for recommending securities products, you’ll see the relationship disclosed in Form ADV. If they are paid based on a percentage of assets managed or a flat-rate for one-off services, that will be spelled out.

Assets Under Management (AUM)

Assets under management (AUM) are securities portfolios (including, for example, stocks, bonds, mutual funds and ETFs) for which an investment advisor provides continuous and regular supervisory or management services. As a client, your AUM is the amount that is being managed by your investment advisor. When evaluating investment advisors, AUM is used mostly as a scale and business-quality metric, not necessarily a direct measure of investment skill. Investment advisors may also use it to set their fees. Higher AUM often signals more clients, institutional credibility, longer operating history and operational maturity. AUM fees are one of the most common fees financial advisory firm charge, alongside flat fees and hourly fees. You usually don’t pay all three fees. You may also encounter other fees when you hire a financial advisor.

Investment advisors, broker dealers and financial planners have different ways of charging for their services.

SEC vs. State Registration

In general, state authorities regulate firms with less than $100 million in AUM; the SEC regulates firms with $100 million or more in AUM. There are some exceptions. Both must file Form ADV.

Wrap Fees

A wrap fee is a bundled investment advisory fee where a client pays one combined fee that “wraps” together multiple services and costs (advisory fees, brokerage fees, execution charges and custodial fees) into a single charge, usually based on AUM. Wrap fee programs can be called by several different names, including asset allocation programs, asset management programs, investment management programs, mini-accounts, uniform managed accounts and separately managed accounts. Wrap fees can save you money under the right circumstances, but they can also create conflicts of interest for your advisor.