How do you know?
Well, what you are advised to buy largely influenced by how much compensation your financial advisor or his or her firm makes on the products being sold to you.
Dealing with investments and insurance products can be complicated and difficult to navigate, which is why many seek out the services of financial advisors, financial planners, or estate planners. But be aware; most financial “advisors” or “planners” are trying to get you to buy what they are selling, meaning that your best interests are in conflict with theirs.
Let me explain.
Investment professionals provide services as brokers, fiduciaries or a hybrid of these two services. The license held by each professional will determine the type of compensation structure that you will pay for their services.
An investment professional who holds a brokerage license has a license to sell. A broker receives payments through commissions or trail compensation based on the investments that are made.
Because broker compensation is directly related to the investments purchased, brokers have an incentive to recommend investment vehicles that provide the highest compensation for them rather than the highest return for you. Besides this obvious conflict of interest, there are a few other things you should be aware of when working with a broker.
Brokered financial services:
• Often limit the number of portfolios or investment vehicles available
• Often mean higher long-term costs than necessary,
• May include excessive transaction costs,
• Often include trail compensation for mutual funds that pay a percentage of your return
to the broker,
• May recommend investments that offer rewards as incentives for brokers,
• Can include investments with hidden fees,
• Set up an inevitable conflict of interest between the client and advisor.
Dual-registered investment professionals are licensed to sell AND advise; their compensation is often a hybrid of brokerage compensation together with a fee payment structure. Dual-registered investment professional often refer to their services as fee-based.
While fee-based services may sound the same as fee-only services – because a fee is charged – they are not the same service.. Dually-registered “advisors” typically charge a fee-based fee, but then also receive other forms of compensation from the sale of investment products to you. In fact, many fee-based “advisors” go to a fee-type model for their business as a way to increase their OWN compensation above what they can make just “advising” you as a broker and making money selling investments to you.
Investment professionals that work on a fee-based basis frequently charge lower fees disclosed for their work than a fee-only advisor. But don’t be deceived; their total compensation is often much more than that of a fee-only advisor due to other compensation they receive from selling investments to you.
Fee-based financial services:
• Charge you an “advisory” fee,
• Provide additional compensation to the “advisor” from product sales,
• Usually limit the investments considered for you to what is available through their broker
• Often result in you paying higher long-term costs than necessary to accomplish your
• Can and often does include investments with hidden fees,
• Sets up a conflict of interest between the client and “advisor”, which the “advisor” would submit is satisfactorily disclosed by the fine print in your agreement.
Eight-five percent of individuals calling themselves financial “advisors” are partially or completely compensated by the investments which they are able to convince you to purchase. They are really more like salespeople peddling their wares rather than financial “advisors”.
The only absolute way to remove the question of conflict of interest is to work with a fee-only fiduciary advisor.
Fee-only fiduciaries are financial professionals who do not possess a license to sell investment products to you. They are licensed only to offer financial advice to you. While some of the “dual-registered ‘advisors’” discussed above also claim to be fiduciaries (because they disclose their conflicts of interest rather than trying to avoid them) a fee-only fiduciary is compensated only by a professional fee for his or her professional advice.The fees a client will pay may, depending upon the business model of the fee-only fiduciary, include hourly fees, financial planning fees and/or asset management fees. But all compensation is paid directly by the client and is clearly and plainly disclosed as the advisor’s fee on the client’s statement.
Fee-only financial services:
• Ensure that investment selection is motivated only by YOUR best interest
• Allow you to benefit from the entire universe of investment alternatives; i.e., investments
that do not require a broker at all as well as the offerings of many different brokers
• Permit the advisor the opportunity to “shop” for the best investments to meet your goals
at to acquire them at the best price possible for you,
• Do not include compensation to the advisor from investment products selected for you
• Do not produce an incentive for the advisor to use one product over another,
• Do not provide incentive to include additional products or services that you may not
Fee-only advisors have the freedom to structure your portfolio with your best interest in mind. They have no personal interest in making one investment choice over another.
Let’s look at how this often plays out in the real world.
Every investment professional can invest in the Exchange –Traded Funds. Such an instrument would be among the most cost-effective ways to gain exposure to the S&P 500.
However in over 25 years in this industry, I’ve never seen an investment of this type in any portfolio created by a broker. The same investment that a fiduciary can make for $6 or $7 with a one-time transaction fee on behalf of the client a miniscule ongoing cost, may cost much more when made through a broker who may opt for compensation out of the fund (taken right out of your investment return) of 1% or more, and who may charge you purchase commissions as high as 5.75% or receive other forms of compensation that reduce your return.
This is just one real-life example of how commission-based compensation can lead to an inherent conflict of interest between the advisor and the client. When taken to the extreme, this conflict of interest is similar to employing a wolf to guard the sheep.
For the best return, you need to be aware of the fees you are actually paying.
The type of compensation structure your financial professional uses can have an impact on the performance of your investment. It’s important to determine the real cost. Savvy investors ask about the fee structure, commissions, and costs of maintenance when making investments.
At Financial Fiduciaries LLC, we compare investments for our clients to find the best fit for their goals. We do not receive commissions or rewards from investment or insurance companies. We provide all of our clients with a clear performance summary measured against an index, which makes it easy to review the return-on-investment.
So how about you? Are your investments placed in your best interest? Have you checked your fee schedule to see if you are spending too much? Do you understand your statements and the performance of your investments?
We can review your portfolio to see if it is meeting your goals, is within your risk tolerance levels and is serving you and not your advisor. Contact us at 1-800-590-8110 or email firstname.lastname@example.org.
Please also visit our website www.financialfiduciariesllc.com if you would like to learn more about our company.