DEFINITION of 'National Association of Personal Financial Advisors (NAPFA)'

A U.S.-based professional association for professional fee-only financial advisors. Formed in 1983, NAPFA requires its members to adhere to the organization’s code of ethics and take an annual fiduciary oath. Members must provide independent, objective financial advice to their clients and uphold the highest standards in the financial planning profession. They must earn their income from fees, not commissions.

BREAKING DOWN 'National Association of Personal Financial Advisors (NAPFA)'

Financial planners can be broadly divided into two categories: 1) those who are compensated with commissions from recommending specific investments to clients, and 2) those compensated with a fee for providing objective investment advice. NAPFA requires its members to be paid in fees rather than commissions, because an advisor who is paid in commissions has an incentive to recommend the investments that he or she receives the highest commissions for, rather than the investments that are best for the client. By charging an hourly fee or a fee based on a percentage of the client’s assets under management, the advisor’s incentives are aligned with the client’s incentives. NAPFA members are also prohibited from receiving referral fees for sending the client to another professional.

NAPFA has additional requirements for its members. They must strive to provide objective advice and avoid giving advice in areas they are not knowledgeable in. They must keep all client information confidential unless the client authorizes sharing information. NAPFA members are required to earn continuing education credits to keep their knowledge and skills current. Financial advisors who join NAPFA must additionally be transparent in their interactions with their clients and do their best to ensure that clients understand how their money is being managed. NAPFA members are also required to act in a way that reflects positively on both NAPFA and the financial planning profession.

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