Questions We Are Often Asked About Financial Planning.

Confused by the terms financial advisors use? Wondering what matters most in a planning relationship? This is a good place to start.

Does a fee-only structure always mean a fiduciary relationship?

Not always. A fee-only arrangement does not guarantee honest and ethical dealings—it’s simply a payment structure. Potential clients should ask advisors for details as to how the fee is calculated and how financial decisions are made on their behalf. PDS Planning has been a fiduciary since day one, meaning we will always place the interest of our clients above our own.

How do I know that a planner will always act in my best interest?

We believe it begins with understanding how advisors are paid—as this can impact the advisor’s likelihood of recommending an investment or opportunity that may or may not financially compensate them. Ask for a copy of the advisor’s Form ADV Part 2A, assuming the advisor is registered with the SEC or their state of residence. Section 5 of the ADV provides the details on the advisor’s compensation method.

What if I am only interested in someone managing my investments?

There are firms that focus solely on investment management, identifying your risk tolerance and time horizon, selecting an appropriate allocation, and managing your rate of return. At the same time, there are firms who take a holistic approach in helping you develop a life plan which includes advice in the following areas of discipline: retirement planning, investment management, cash flow and tax planning, insurance planning , estate planning, and education planning. The key is to ask enough questions so that you can identify a firm whose approach aligns best with your financial needs.

What’s the difference between fee-only and fee-based financial planning?

In a fee-only structure clients pay the advisor a fee for services rendered. This could be in the form of an annual retainer fee, a fee based on a percentage of the client’s investment assets that are actively managed, or a combination of the two. Under this arrangement, the planner/advisor is paid directly by the client and receives no commissions for the investment advisory services performed. This mitigates potential conflicts of interest and incentive for the advisor to favor one product over another because of the potential commission income. Clients may pay the advisor directly or may have the fee deducted from their investment portfolio.

Under a fee-based structure, the advisor may charge a fee for services, and the fee may be reduced or offset by commissions received from the sale of investment products. They may also still collect commission income on products that the client purchases.

What is a commission-only financial structure?

In a commission-only structure the advisor is compensated directly as a result of products that are sold to their clients. In this arrangement, the advisor holds a securities and/or insurance license in order to receive commission income and is registered with a broker/dealer, who establishes a commission payout level for the advisor. The mutual funds and insurance companies pay the commissions to the broker/dealer, who then pays the advisor. These up-front commissions generally range from 0.25% to 5% or more of the total initial investment amount. In addition to commissions paid from sales of products, the advisor may also be compensated on a quarterly basis from trail commissions paid by the mutual funds and insurance companies. Mutual fund trail commissions, when they exist, are part of each fund’s 12B-1 fees, and can range from 0.25% to as high as 2% per year, depending on the specific fund. Because there are different commission payouts on different products, there may be an incentive for an advisor or the advisor’s broker/dealer to use a higher-payout product over a lower-payout product.

Can I do this on my own, without paying a financial advisor?

Yes. We believe you need three critical components to successfully accomplish this. First, you need a desire to do it on your own. Often, this is a function of having enough spare time. Second, you need enough financial acumen to filter the unbelievably wide spectrum of opinion and information that exists and will inevitably make its way to your eyes and ears. Finally, you need to be able to divorce yourself from the emotions that will present themselves, allowing you to maintain the conviction of your decisions in the face of doubt.

Why do I need to pay for services when there is a broad range of financial information available?

Information is not necessarily knowledge and is not a substitute for wisdom, experience and well-informed professional judgment (and emotions often get in the way of sound decision-making).

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