“Financial advisor” is a famously loose term. It can describe professionals operating under meaningfully different legal standards and compensation models. Understanding those differences is one of the most useful pieces of homework a prospective client can do.
The fiduciary standard
An investment adviser acting as a fiduciary is legally obligated to act in the client’s best interest, to seek to avoid conflicts of interest, and to disclose material conflicts that cannot be avoided. Registered investment advisers (RIAs) are held to this standard under the Investment Advisers Act of 1940. Other financial professionals may operate under different standards, such as Regulation Best Interest, which applies to broker-dealers when making recommendations.
How advisors are paid
Compensation models shape incentives, so it is fair, and expected, to ask about them directly. Common models include:
- Fee-only: the advisor is paid solely by the client, through asset-based, flat, or hourly fees, and receives no commissions.
- Fee-based: the advisor charges fees and may also receive commissions on certain products.
- Commission-based: the advisor is compensated through product sales.
How to verify an advisor
Every SEC-registered adviser files a Form ADV, a public document describing services, fees, conflicts, and disciplinary history. You can look up any adviser or firm at adviserinfo.sec.gov. Reading Form ADV Part 2A and the Form CRS relationship summary before an introductory meeting turns a sales conversation into an informed interview.
Questions worth asking any advisor
A short list that reveals a great deal:
- Are you a fiduciary at all times, for all accounts and recommendations?
- How exactly are you compensated, and by whom?
- What conflicts of interest do you have, and how are they disclosed?
- What services are included: planning, investments, tax coordination, or all three?
- Who holds custody of my assets?
Important disclosures
This article is provided for educational and informational purposes only and should not be construed as personalized investment, tax, or legal advice. The information presented is general in nature and may not be appropriate for your individual circumstances. Litchfield Financial, LLC does not provide tax or legal advice; please consult a qualified tax professional or attorney regarding your specific situation. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. No strategy, including diversification or asset allocation, assures a profit or protects against loss in declining markets.
Litchfield Financial, LLC provides investment advisory services through Claro Advisors Inc. (“Claro”), a registered investment advisor. Claro Advisors Inc. is a Registered Investment Advisor with the U.S. Securities and Exchange Commission (“SEC”) based in the Commonwealth of Massachusetts. Registration of an Investment Advisor does not imply any specific level of skill or training. Information contained herein is for educational purposes only and is not to be considered investment advice.
