There exists a simple but undeniable truth in the financial consulting and wealth preparing industry that Wall Street offers kept as a “dirty little secret” for years. That dirty little, and nearly always overlooked secret is THE WAY YOUR FINANCIAL ADVISOR IS PAID DIRECTLY AFFECTS THEIR FINANCIAL SUGGESTIONS TO YOU!
You want, and deserve (and consequently SHOULD EXPECT) unbiased monetary advice in your best interests. But the truth is 99% of the general investing public has no idea how their economic advisor is compensated for the guidance they provide. This is a tragic oversight, however an all too common one.
If you have any inquiries concerning wherever and how to use click here, you can contact us at the website.
You can find three basic compensation models for financial advisors – commissions dependent, fee-based, and fee-only.
Commission Dependent Financial Advisor – These experts sell “loaded” or commission spending products like insurance, annuities, plus loaded mutual funds. The commission payment your financial advisor is earning on your transaction may or may not be disclosed to you. I say “transaction” because that’s what commission based financial experts do – they facilitate DEALINGS. Once the transaction is over, you may be lucky to hear from them again because they already have already earned the bulk of whatever payment they were going to earn.
Since these advisors are paid commissions which might or may not be disclosed, and the amounts may vary based on the insurance and expense products they sell, there is an inherent issue of interest in the financial advice provided 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! That’s not to say presently there aren’t some honest and ethical 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 know 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 believes that hiring a Fee-Based Financial Consultant is directly correlated with “honest, honest 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 charges AND commissions from selling insurance policy and investment products! So the “base” of their compensation may be tied to a percentage of the assets they deal with on your behalf, then the “icing on the cake” is the commission income they can possibly earn by selling you commission payment driven investment and insurance items.
Neat little marketing trick right? Lead off with the word “Fee” so the general public thinks the settlement 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 economic advice is through a FEE-ONLY economic advisor. I stress the word “ONLY”, because a truly fee ONLY financial advisor CAN NOT, and WILL NOT take 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 black and white, there are no hidden forms of settlement! Fee-Only financial advisors believe in FULL DISCLOSURE of any potential issues of interest in their compensation and the monetary advice and guidance provided to you.
Understanding the conflict of interest in the economic 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 genuine way to get the most unbiased, honest plus ethical advice possible and that is via a financial advisor who believes within, and practices, full disclosure.
Commission payment and Fee-Based financial advisors usually don’t believe in or practice full-disclosure, because the sheer magnitude of the the particular fees the average investor/consumer pays would certainly 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 plus talk to a salesperson – that salesperson asks what type of vehicle you have in mind and shows you their line of trucks. Of course , to that salesperson who earns a commission when you buy a vehicle – ONLY FORD has the right truck for you. It’s the best, it’s the only way to go, and if you don’t purchase that truck from that salesperson you’re crazy!
The fact is Toyota makes great trucks, GM makes great trucks, Dodge makes great vehicles. The Ford may or may not be the best pickup truck 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 a 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 answer to all of your financial problems. The fact is, whenever all you have is a hammer… everything appears like a nail!
Now consider to get a moment you hired a car buying advisor and paid them a set fee. That advisor is an professional and stays current on all the new vehicles. That advisor’s only incentive is to find you the most suitable truck for you, the one that hauls probably the most, tows the best, and is clearly your best option available. They earn a fee for their service, so they want you to definitely be happy and refer your family and friends 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 that’s right for you because they want to add value 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 accessible investments with the lowest possible price. A Fee-Only financial advisor’s only incentive is to keep you happy, in order to earn your trust, to provide the perfect financial advice and guidance utilizing the most appropriate investment tools and preparing practices.
So on one hand you have a vehicle salesperson who’s going to earn the commission (coincidentally the more you buy 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 also shops all of the vehicles to find the most appropriate one for your specific needs, and because of his relationships with all of the vehicle 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 if you’re paying and what you’re getting in come back for the compensation your Fee-Only economic advisor earns. Everything is in monochrome, 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 specialists are truly FEE-ONLY. The reason for this? There’s a clear and substantial disparity in a financial advisor’s income produced through commissions (or commissions plus fees), and the income a financial advisor makes through the Fee-Only model:
Example #1 – You just changed employment and 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 method in most cases and for many reasons) plus earn a 5% (or many times more) commission ($12, 500) and get an ongoing, or “trailer” commission associated with 1% (plus or minus) corresponding 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 the portfolio to manage it. Let’s say in this instance you pay a $500 pension plan fee and 1 . 25% of assets managed (very typical for a Fee-Only financial advisor within this situation). That advisor earns $250 plus $3, 125 ($250, 500 * 1 . 25%) or COMPLETE COMPENSATION of $3, 625 – FAR LESS THAN THE $15, 000 THE PARTICULAR COMMISSION (or Fee-Based) financial advisor 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 calendar year!
Example #2 – You’re outdated and managing a $750, 000 nest egg which needs to provide you revenue for the rest of your life. A fee-based monetary advisor may recommend putting $400, 000 into an single superior immediate annuity to get you income as well as the other $350, 000 into a fee-based managed mutual fund platform. The particular annuity may pay a percentage of 4% or $16, 500 and the fee-based managed mutual finance 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 look at municipal bonds, or any other variety of options available. It’s hard to say just how much the Fee-Only advisor would acquire 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 profile 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 each year and it takes that financial consultant THREE YEARS to earn what the fee-based financial advisor earned in ONE CALENDAR YEAR!
The prior examples are very common in today’s financial advisory industry. It’s unlucky that such a disparity in income exists between the compensation models, or even there would likely be many more truly independent and unbiased Fee-Only monetary advisors today!
Now consider for the moment which financial advisor works harder for you AFTER the initial consultation services an planning? Which financial advisor must consistently earn your rely on and add value to your monetary and investment planning? It’s obvious the financial advisor with the most to get rid of is the Fee-Only advisor. A Fee-Only financial advisor has a direct loss of income on a regular basis from losing a customer.
The commission or fee-based monetary advisor however has little to get rid of. You can fire them after they’ve put you in their high commission products, and as you can see from the good 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 and investment planning, and little to reduce by losing you as a customer.