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 beware: 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. The license held by your advisor 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 compensation from the investments that are made. Because broker compensation is directly related to the investments purchased, they 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 several 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 compensation for mutual funds that pay a percentage of your return to the broker.
- May recommend investments that offer rewards as incentives for the brokers.
- Can include investments with hidden fees.
- Set up an inevitable conflict of interest between the client and advisor.
Fee-Based (also called Dual-Registered or Hybrids)
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 professionals 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. Dual-registered “advisors” typically charge a fee based on assets under management (AUM), but then also receive other forms of compensation from the sale of investment products to you. In fact, many fee-based “advisors” went to a fee-type model for their business as a way to increase their compensation. Although investment professionals that work on a fee-based basis frequently charge lower fees for their work than a fee-only advisor, 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 to what is available through their broker/dealer.
- Often result in you paying higher than necessary long-term costs to accomplish your goals.
- Often include investments with hidden fees.
- Set up a conflict of interest between the client and “advisor”.
According to PBS’s documentary, The Retirement Gamble, 85% 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 more like salespeople peddling their wares rather than financial “advisors”.
Fee-only fiduciaries are financial professionals who do not possess a license to sell investment products to you. A fee-only fiduciary is compensated only by a professional fee for their professional advice and/or financial management of client investments. The fees a client may pay, depending upon the business model of the fee-only fiduciary, include hourly fees, financial planning fees and/or assets under management (AUM) fees. 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
and 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 need.
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. 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.
At Financial Fiduciaries, 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.