If you keep up with the financial world or dabble in investment news from time to time, then you should know certain terminology in order to feel more comfortable that you’re receiving sound financial advice. We've compiled this list because we want you to know your stuff, just like we do:
1. Fee-only Advisors
Advisors that operate as fee-only advisors are fiduciaries. They don’t accept commissions on the products they sale or recommend. Instead fee-only advisors charge an assets under management fee, hourly, project based, or a yearly fee to service their clients. In doing so, they foster trustworthy relationships with their clients and often times serve multiple generations within the same family.
2. Fee-based Advisors
Fee-based can sound misleading whereas not only does an advisor receive fees under a Fee-based compensation system, but they also can accept commissions from financial products recommended or annuities and insurance sold. This advisor operates under a hybrid of both a fee-only advisor and a broker.
3. Broker Advisors
A broker is an individual that receives commissions for executing financial products and buy and sell orders requested by an investor. In other words, brokers can be considered product sales people within the financial industry. Under current law, product costs and associated compensation is very difficult to understand and can often be glossed over by both the broker and the clients. This may be a hint as to why the industry is in a frenzy over the Department of Labor Fiduciary ruling.
The official definition of fiduciary is “involving trust, especially with regard to the relationship between a trustee and a beneficiary.” Fiduciary means that a person who is trusted to provide advice to another must do so with the least amount of conflict of interest. Fiduciary’s don’t receive commissions on the products they sale.
B-I-C-E, or the Best Interest Contract Exemption for retirement plan brokers, provides that fiduciaries can receive commissions if the details are enclosed in a binding contract between the advisor and purchaser. The contract provides transparency in transactions and aims to educate the consumer on potential conflicts of interest. As an investor, it’s important to be aware of this contract so in the future you can educate yourself and make an informed decision about the products you are purchasing or selling.
The financial industry over time has earned itself a clouded reputation. There is a lot of gray area and industry jargon that’s confusing for the investor to consume. As an investor, it’s beneficial to be aware of industry terminology to make informed decisions.
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