One of the things I dislike about the financial services business is that all too often it tries to make things (seem) complicated and difficult to understand. I believe part of my role as an advisor is to help others understand and feel comfortable with investments and their financial plan.
First, you must realize, there are costs to investing and you need to accept that.
You want to understand the costs that you are paying and feel comfortable that you are getting enough benefit/value for the fees that you are paying.
Financial Advisors must get paid in some way – otherwise, why would they be doing what they do? They need to make a living. You should know exactly how your advisor is paid and how much you are paying them each year. If you are not sure, ask and have them show you.
Some advisors and investment product fees are more transparent than others.
I know from personal experience, some clients would rather not know or see how much they are paying their advisors. This does not make sense to me but it is true. If they don’t “see” how much they have to pay, they feel better about it. BUT that does not mean they are not paying these fees. They are just choosing to not know the payment amount.
Financial Advisors can be paid in multiple different ways. The most common are:
Commission-Only Advisors – They earn their income by receiving a sales commission on financial products sold such as insurance, annuities, mutual funds or earn a fee for trades that they execute.
Fee-Only Advisors – are paid only directly by the client, not from anyone else. Fee-only advisors can charge in three ways:
- An hourly fee – here you pay for the advisor’s time, similar to a lawyer. They have an hourly rate and charge you for the number of hours that they do work for you. It is always good to get an estimate of the cost from the advisor before you start working with them.
- Flat fee – here the advisor charges a set fee for a “package” of services. Be sure you understand what services will be provided for the fee quoted.
- Retainer fee – this fee is most commonly based on a percentage of assets the advisor manages for you.
Commission and Fees or Fee Based Advisors – The advisor can be paid by some combination of commission and fees. The most common is that they would charge you for a financial plan or a percentage of your assets and they can also receive payment for commissions when they sell you an insurance or investment product that they recommended for you.
Salary plus bonuses – some advisors are paid a base salary and then receive bonuses for certain specified events such as bringing in new accounts or selling certain investment products.
As with most things, there is no one “best” compensation model. Each model will create different biases and motivations. What is important is to know how your advisor is paid and recognize how that can influence the advice you receive.
For example, if an advisor is paid for insurance then they are more likely to see insurance as a good solution for you in more situations and someone who is not paid for insurance may have alternative recommended solutions. Or if an advisor is paid based on the number of transactions they may recommend more buy and sells than someone who is not compensated this way.
The most important aspect in choosing an advisor is going with one that you trust and feel comfortable with. Listen to your gut. You should want to work with this person for a long time and feel that they will serve you and your money well.
You pay to outsource things you don’t like to do or don’t have time to do in your life (i.e. I am happy to pay someone to help clean my house). You should feel comfortable paying for expertise with your finances too. Your financial advisor should help you accomplish your financial and I believe, life goals too, better than you can on your own. What is that worth to you?
You want an advisor who will prioritize what is best for you but recognize that how they are paid can create biases. Remember no one will care about your money more than you do so you should feel confident that you understand what you are paying for, how your advisor is paid, and that the costs are worth the value you are receiving.
I would love to hear what questions you have or any other topics you would like for me to write about in the future.
Have a good week!
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