There is a simple but undeniable truth in the financial consulting and wealth preparing industry that Wall Street has kept as a “dirty little secret” for years. That dirty little, and nearly always overlooked secret is THE METHOD YOUR FINANCIAL ADVISOR IS COMPENSATED DIRECTLY AFFECTS THEIR FINANCIAL ASSISTANCE TO YOU!
You want, and deserve (and consequently SHOULD EXPECT) unbiased economic advice in your best interests. But the fact is 99% of the general investing open public has no idea how their monetary advisor is compensated for the advice they provide. This is a tragic oversight, yet an all too common one. There are three basic compensation models to get financial advisors – commissions dependent, fee-based, and fee-only.
Commission Dependent Financial Advisor – These experts sell “loaded” or commission paying products like insurance, annuities, and loaded mutual funds. The commission rate 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 lucky to hear from them again because they have already already earned the bulk of whatever commission payment they were going to earn.
Since these types of advisors are paid commissions which may or may not be disclosed, and the quantities may vary based on the insurance and purchase products they sell, there is an inherent issue of interest in the financial advice provided to you and the commission these financial advisors earn. If their income is dependent on transactions and selling insurance plus investment products, THEY HAVE A FINANCIAL INCENTIVE TO SELL YOU WHATEVER PAYS THEM THE HIGHEST COMMISSION! That’s not to say generally there aren’t some honest and honest commission based advisors, but obviously this identifies a conflict appealing.
Fee Based Financial Advisor – Below is the real “dirty little secret” Wall structure Street doesn’t want you to know about. Wall Street (meaning the firms and organizations involved in buying, promoting, or managing assets, insurance plus investments) has sufficiently blurred the 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, ethical and unbiased” financial advice.
The truth is FEE-BASED MEANS NOTHING! Think about it (you’ll understand more when you learn the 3rd type of compensation), all fee-BASED indicates is that your financial advisor can take fees AND commissions from selling insurance and investment products! So the “base” of their compensation may be associated with a percentage of the assets they handle on your behalf, then the “icing on the cake” is the commission income they can potentially earn by selling you percentage driven investment and insurance items.
Neat little marketing trick correct? Lead off with the word “Fee” so the general public thinks the payment model is akin to the likes of lawyer’s or accountants, then add the word “based” after it to cover their tails when these advisors sell a person products for commissions!
FEE ONLY Financial Advisor – By far, the best and unbiased way to get financial advice is through a FEE-ONLY financial advisor. I stress the word “ONLY”, because a truly fee ONLY financial advisor CAN NOT, and WILL NOT acknowledge commissions in any form. A Fee-ONLY financial advisor earns FEES in the form of hourly compensation, project financial planning, or a percentage of assets managed on your behalf.
All fees are in monochrome, there are no hidden forms of settlement! Fee-Only financial advisors believe in COMPLETE DISCLOSURE of any potential conflicts of interest in their compensation and the financial advice and guidance provided to 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 advisors also – they earn fees AND commissions! Hence – FEE-BASED MEANS NOTHING! There is only one true way to get the most unbiased, honest plus ethical advice possible and that is via a financial advisor who believes in, and practices, full disclosure.
Commission rate and Fee-Based financial advisors generally don’t believe in or practice full-disclosure, because the sheer magnitude of the the fees the average investor/consumer pays would surely make them think twice. Here’s more information in regards to brucbond.com check out the internet site.
Consider for a moment you need to buy a truck specifically for towing and hauling heavy tons. 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 vehicles. Of course , to that salesperson who makes a commission when you buy a truck – ONLY FORD has the right 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 can make great trucks, GM makes great trucks, Dodge makes great vehicles. The Ford may or may not be the best truck for your needs, but the salesperson ONLY shows you the Ford, because that’s ALL the salesperson can sell you and make a commission from.
This is similar to a commission based financial advisor. If they sell annuities, they’ll show you annuities. If they sell mutual funds, all they’ll show you is commission spending mutual funds. If they sell life insurance coverage, they’ll tell you life insurance is the solution to all of your financial problems. The fact is, whenever all you have is a hammer… everything seems like a nail!
Now consider for the moment you hired a car buying advisor and paid them a flat fee. That advisor is an specialist and stays current on all the new vehicles. That advisor’s just incentive is to find you the most appropriate truck for you, the one that hauls the most, tows the best, and is clearly the best option available. They earn a fee for their service, so they want you to definitely be happy and refer your friends and family to them. They even have special preparations worked out with all of the local car dealers to get you the best price on the truck that’s right for you because they want to add worth to your relationship with them.
The analogy 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, in order to earn your trust, to provide the best possible financial advice and guidance utilizing the most appropriate investment tools and preparing practices.
So on one hand you have a car salesperson who’s going to earn a commission (coincidentally the more you spend on the truck the more they earn! ) to sell you one of the trucks off their lot. On the other hand, there is a trusted car buying advisor who else shops all of the vehicles to find the most appropriate one for your specific needs, and then because of his relationships with all of the car dealers can also get you the best possible price on that vehicle. Which would you prefer?
Truly unbiased financial advice and guidance comes in the form of Fee-Only financial planning. You know exactly what occur to be 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 advice given to you by a true Fee-Only financial advisor!
The fact is unfortunately less than 1% of all financial advisor experts are truly FEE-ONLY. The reason for this particular? There’s a clear and substantial disparity in a financial advisor’s income created through commissions (or commissions plus fees), and the income a financial advisor earns through the Fee-Only model:
Example #1 – You just changed employment plus you’re rolling over a $250, 000 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) plus earn a 5% (or often more) commission ($12, 500) and obtain an ongoing, or “trailer” commission associated with 1% (plus or minus) equal to $2, 500 per year. The Fee-Only financial advisor may charge you the fee for retirement plan, an hourly fee, or a percentage of your portfolio to manage it. Let’s say in this instance you pay a $500 pension plan fee and 1 . 25% of assets managed (very common for a Fee-Only financial advisor on this situation). That advisor earns $250 plus $3, 125 ($250, 1000 * 1 . 25%) or COMPLETE COMPENSATION of $3, 625 – FAR LESS THAN THE $15, 000 THE COMMISSION (or Fee-Based) financial advisor earned! In fact it takes the Fee-Only financial advisor over four many years to earn what the commission (or fee-based) advisor earned in one 12 months!
Example #2 – You’re outdated and managing a $750, 000 home egg which needs to provide you earnings for the rest of your life. A fee-based monetary advisor may recommend putting $400, 000 into an single premium immediate annuity to get you income and the other $350, 000 into a fee-based managed mutual fund platform. The annuity may pay a commission payment of 4% or $16, 000 and the fee-based managed mutual account portfolio may cost 1 . 25% for total compensation of $20, 375 first year (not such as 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 selection of options available. It’s hard to say just how much the Fee-Only advisor would gain as their largest incentive is to keep you the client happy, and provide the best planning advice and guidance possible for your situation. BUT , in this case let’s just assume that a managed mutual fund portfolio was implemented with an averaged cost of 1% (very common for that amount of assets), so the Fee-Only financial advisor earns roughly $7, 500 per year and it takes that financial advisor THREE YEARS to earn what the fee-based financial advisor earned in ONE SEASON!
The prior examples are very common in today’s financial advisory industry. It’s unlucky that such a disparity in revenue exists between the compensation models, or there would likely be many more truly independent and unbiased Fee-Only financial advisors today!
Now consider to get a moment which financial advisor will work harder for you AFTER the initial consultation services an planning? Which financial consultant must consistently earn your rely on and add value to your monetary and investment planning? It’s apparent the financial advisor with the most to get rid of 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 economic advisor however has little to reduce. You can fire them after they’ve put you in their high commission products, and as you can see from the examples they’ve already made the majority of the profits they’re going to make on you as a customer. They have little to gain by continuing to add value to your financial plus investment planning, and little to reduce by losing you as a customer.