There exists a simple but undeniable truth within the financial consulting and wealth planning industry that Wall Street has kept as a “dirty little secret” for years. That dirty little, plus nearly always overlooked secret is THE METHOD YOUR FINANCIAL ADVISOR IS PAID DIRECTLY AFFECTS THEIR FINANCIAL TIPS TO YOU!
You want, and deserve (and consequently SHOULD EXPECT) unbiased financial advice in your best interests. But the truth is 99% of the general investing general public has no idea how their financial advisor is compensated for the assistance they provide. This is a tragic oversight, however an all too common one. You will find three basic compensation models intended for financial advisors – commissions dependent, fee-based, and fee-only.
Commission Based Financial Advisor – These advisors sell “loaded” or commission having to pay products like insurance, annuities, and loaded mutual funds. The payment your financial advisor is earning on your transaction may or may not be disclosed to you. I say “transaction” because which is what commission based financial advisors do – they facilitate DEALINGS. Once the transaction is over, you may be fortunate to hear from them again because they have already already earned the bulk of whatever commission rate they were going to earn.
Since these types of advisors are paid commissions which might or may not be disclosed, and the quantities may vary based on the insurance and investment products they sell, there is an inherent discord of interest in the financial advice given to you and the commission these financial experts earn. If their income is dependent upon transactions and selling insurance and investment products, THEY HAVE A FINANCIAL MOTIVATION TO SELL YOU WHATEVER PAYS THEM THE HIGHEST COMMISSION! Here is more information regarding more info visit the web page.
That’s not to say presently there aren’t some honest and honest commission based advisors, but clearly this identifies a conflict appealing.
Fee Based Financial Advisor – Here’s the real “dirty little secret” Walls Street doesn’t want you to learn about. Wall Street (meaning the companies and organizations involved in buying, offering, or managing assets, insurance plus investments) has sufficiently blurred the particular lines between the three ways your own financial advisor may be compensated that will 99% of the investing public feels that hiring a Fee-Based Financial Advisor is directly correlated with “honest, honest and unbiased” financial advice.
The reality is FEE-BASED MEANS NOTHING! Think about it (you’ll understand more when you learn the 3rd type of compensation), all fee-BASED means is that your financial advisor can take charges AND commissions from selling insurance policy and investment products! So a “base” of their compensation may be tied to a percentage of the assets they handle on your behalf, then the “icing on the cake” is the commission income they can possibly earn by selling you commission driven investment and insurance items.
Neat little marketing trick correct? Lead off with the word “Fee” so the general public thinks the compensation model is akin to the likes of attorney’s or accountants, then add the word “based” after it to cover their tails when these advisors sell a person products for commissions!
FEE JUST Financial Advisor – By far, the best and unbiased way to get economic advice is through a FEE-ONLY financial advisor. I stress the word “ONLY”, because a truly fee ONLY economic advisor CAN NOT, and WILL NOT acknowledge commissions in any form. A Fee-ONLY financial advisor earns FEES by means of hourly compensation, project financial planning, or a percentage of assets managed on your behalf.
All fees are in black and white, there are no hidden forms of settlement! Fee-Only financial advisors believe in COMPLETE DISCLOSURE of any potential issues of interest in their compensation and the financial advice and guidance provided for you.
Understanding the conflict of interest in the financial advice given by commission based brokers enables you to clearly identify the conflict of interest for fee-based financial experts also – they earn fees AND commissions! Hence – FEE-BASED MEANS NOTHING! There is only one correct way to get the most unbiased, honest and ethical advice possible and that is by way of a financial advisor who believes in, and practices, full disclosure.
Payment and Fee-Based financial advisors usually don’t believe in or practice full-disclosure, because the sheer magnitude of the the fees the average investor/consumer pays might surely make them think twice.
Consider for any moment you need to buy a truck specifically for towing and hauling heavy a lot. You go to the local Ford dealership and talk to a salesperson – that will salesperson asks what type of vehicle you’re interested in and shows you their line of trucks. Of course , to that salesperson who earns a commission when you buy a pickup truck – ONLY FORD has the correct truck for you. It’s the best, it is the only way to go, and if you don’t buy that truck from that salesperson you’re crazy!
The fact is Toyota makes great trucks, GM makes excellent trucks, Dodge makes great trucks. The Ford may or may not be the best vehicle for your needs, but the salesperson ONLY teaches you the Ford, because that’s All of the salesperson can sell you and make a commission from.
This is similar to the commission based financial advisor. If they sell annuities, they’ll show you annuities. If they sell mutual funds, all of they’ll show you is commission having to pay mutual funds. If they sell life insurance coverage, they’ll tell you life insurance is the way to all of your financial problems. The fact is, when all you have is a hammer… everything looks like a nail!
Now consider for a moment you hired a car purchasing advisor and paid them a set fee. That advisor is an specialist and stays current on all of the new vehicles. That advisor’s only incentive is to find you the most appropriate truck for you, the one that hauls probably the most, tows the best, and is clearly your best option available. They earn a charge for their service, so they want you to definitely be happy and refer your friends and family to them. They even have special agreements worked out with all of the local car dealers to get you the best price on the truck you got it for you because they want to add worth to your relationship with them.
The example of a “car buying advisor” is similar to a Fee-Only financial planner. Fee-Only financial advisor’s use the best available investments with the lowest possible cost. A Fee-Only financial advisor’s just incentive is to keep you happy, to earn your trust, to provide the best financial advice and guidance using the most appropriate investment tools and preparing practices.
So on one hand you have a car salesperson who’s going to earn the commission (coincidentally the more you pay for the truck the more they generate! ) to sell you one of the trucks off their lot. On the other hand, you have a trusted car buying advisor which shops all of the vehicles to find the most appropriate one for your specific needs, after which because of his relationships with all of the vehicle dealers can also get you the best possible price on that vehicle. Which would you like?
Truly unbiased financial advice and guidance comes in the form of Fee-Only financial planning. You know exactly what you aren’t paying and what you’re getting in return for the compensation your Fee-Only monetary advisor earns. Everything is in black and white, and there are no hidden agenda’s or conflicts of interest in the tips given to you by a true Fee-Only financial advisor!
The fact is unfortunately less than 1% of all financial advisor professionals are truly FEE-ONLY. The reason for this? There’s a clear and substantial difference in a financial advisor’s income created through commissions (or commissions and fees), and the income a financial advisor earns through the Fee-Only model:
Example #1 – You just changed employment and you’re rolling over a $250, 1000 401k into an IRA. The commission based advisor may market you a variable annuity in your IRA (which is a very poor planning strategy in most cases and for many reasons) and earn a 5% (or many times more) commission ($12, 500) and get an ongoing, or “trailer” commission of 1% (plus or minus) equal to $2, 500 per year. The Fee-Only financial advisor may charge you the fee for retirement plan, a good hourly fee, or a percentage of the portfolio to manage it. Let’s say in cases like this you pay a $500 retirement plan fee and 1 . 25% of assets managed (very typical for a Fee-Only financial advisor in this particular situation). That advisor earns $250 plus $3, 125 ($250, 500 * 1 . 25%) or TOTAL COMPENSATION of $3, 625 — FAR LESS THAN THE $15, 000 THE COMMISSION (or Fee-Based) financial consultant earned! In fact it takes the Fee-Only financial advisor over four yrs to earn what the commission (or fee-based) advisor earned in one year!
Example #2 – You’re upon the market and managing a $750, 000 home egg which needs to provide you earnings for the rest of your life. A fee-based financial advisor may recommend putting $400, 000 into an single high quality immediate annuity to get you income as well as the other $350, 000 into a fee-based managed mutual fund platform. The annuity may pay a payment of 4% or $16, 500 and the fee-based managed mutual account portfolio may cost 1 . 25% for total compensation of $20, 375 first year (not including the “trailer” commissions). The Fee-Only advisor would possibly shop low load annuities for you, possibly put the entire profile into a managed account, possibly take a look at municipal bonds, or any other number of options available. It’s hard to say how much the Fee-Only advisor would make as their largest incentive is to a person the client happy, and provide the best planning advice and guidance possible for your circumstances. BUT , in this case let’s just assume that a managed mutual fund profile was implemented with an averaged cost of 1% (very common for that amount of assets), so the Fee-Only financial consultant earns roughly $7, 500 each year and it takes that financial consultant THREE YEARS to earn what the fee-based financial advisor earned in ONE 12 MONTHS!
The prior examples are very common in today’s financial advisory industry. It’s regrettable that such a disparity in revenue exists between the compensation models, or even there would likely be many more really independent and unbiased Fee-Only financial advisors today!
Now consider to get a moment which financial advisor works harder for you AFTER the initial consultation services an planning? Which financial consultant must consistently earn your believe in and add value to your financial and investment planning? It’s apparent the financial advisor with the most to reduce is the Fee-Only advisor. A Fee-Only financial advisor has a direct lack of income on a regular basis from losing a customer.
The commission or fee-based financial advisor however has little to lose. You can fire them after they’ve put you in their high commission payment products, and as you can see from the illustrations they’ve already made the majority of the commissions they’re going to make on you as a customer. They have little to gain by continuing to add value to your financial and investment planning, and little to shed by losing you as a customer.