Thanks for coming back for the latest edition of Planning for your Purpose; Telos Financial’s blog where I discuss different financial planning topics. Dennis LaVoy is Ann Arbor’s financial advisor serving clients around southeast Michigan and across the country. The purpose of the blog is to introduce financial planning concepts and questions I receive from clients that I believe are important. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!
Compensation is important in your professional life, but is also important to understand with those who provide advice to you. It’s one of the core pieces of information you should pay attention to when choosing a financial planner. It’s important to understand this, because as history has shown over and over, follow the money to find the true motivations.
So, how do financial advisors get paid?
Personally, I practice as a fee based financial advisor. What does that mean? It means the bulk of my compensation comes from advisory fees charged on an ongoing basis on the assets I manage. As an example, I charge 1% on most client’s accounts I manage. It’s a quarterly fee (so 0.25% each quarter) that’s automatically deducted from the accounts I’m the representative on. It’s pretty straightforward, transparent, and simple to understand.
Similarly, I offer charges on a monthly retainer basis for clients who don’t invest assets with me, but still want financial advice. I offer hourly billing for clients who have occasional questions, but want to manage their assets themselves and don’t feel an ongoing relationship is necessary. I also offer flat fee financial planning. I will create a full, executable financial plan along with a meeting to walk through the pieces of the plan for a flat fee. The client will then handle the implementation on their own.
Advisory fee, hourly, flat fee, and retainer, those methods of compensation are basically all that make up the fee only compensation methods.
So, what does “fee based” mean?
Fee based means the majority of compensation is through the methods described above, but the advisor may also accept commissions.
What’s a commission?
A commission is compensation paid by a vendor for a sale of a product. For example, if I recommend life insurance to a client, and the client buys it, the insurance company pays me for that.
A “fee only” planner would either not discuss insurance at all with their clients, recommend an insurance amount and let the client find somewhere to buy it, or find an insurance agent to purchase the insurance through.
Because I practice holistic, comprehensive financial planning, I believe it’s in my client’s best interest to save the time and energy of making multiple stops, when they can just get the insurance through me. I always let my clients know that I will be paid by the insurance company in advance, and the client saves time and energy by not having to shop around, go to another appointment, or interview other professionals. I believe it’s a win-win. The client has more insurance choices are sure to be integrated with their financial goals.
Clearly, you could take the initiative and shop around the direct marketplace and potentially save that way, the same as any product. Just as having someone mow your lawn is more expensive than mowing it yourself, having someone research and vet insurance may be more expensive than shopping around, though you will likely be comparing different insurance companies.
What are commission type products?
Really, any product can be commissionable. The way a lot of the financial services industry was established was on commissions; they are still slowly working their way out of the practice. Life insurance, annuities, disability insurance, and long-term care insurance are some of the primary products a holistic advisor will offer that pay a commission from the product company to the advisor. Mutual funds, stocks, bonds, ETFs, and other securities can also pay commissions.
Some of these commission products pay the exact same as a fee account – 1% per year paid quarterly. The industry is rapidly changing and there are some commission free, fee compatible products, but they are few and far between.
That’s why it’s important to understand how your advisor gets paid. There are a lot of ways it happens and as long as you understand it and feel that it is fair based on the relationship, there’s nothing wrong with it. I believe it’s most important that you have good financial advice and are making informed decisions.
Where can this go wrong?
Some fee only advisors may disparage fee based or commission advisors because the commissions aren’t transparent. The argument goes that if the insurance company or other vendor is paying the advisor, that’s where the advisor’s interest is, not with the client. There’s clear logic to that thinking, but I believe that as long as the fee is disclosed, it is transparent and the saved energy by the client is worth it. There may be advisors who would recommend a product that has the highest payout, another reason it’s so important to know, trust, and have a strong relationship your advisor.
I disclose my commissions and as a fiduciary for my clients, I believe it’s in their interest to save the additional time and energy spent shopping around a policy when I can provide it for them. There could be advisors that will recommend products because they get paid more, but as a fiduciary, I don’t practice that way. I will research all available options and present what I feel are the best choices.
The argued benefit to being fee only is that the advisor is not able to receive any commissions. That’s fine and all, but it ignores a lot of other conflicts of interest that exist and removes some of the checks and balances associated with a dually registered or broker dealer affiliated firm. Bernie Madoff was a fee only advisor after all and he executed the largest ponzi scheme of all time.
Telos Financial is Michigan’s financial advisor for Millennials, Xennials, Generation Xers, & young professionals. It is a fee based, holistic financial planning firm located in Plymouth, Michigan serving young professionals and families. Dennis LaVoy, CFP®, CLU® founded Telos in his tenth year as an advisor and uses his experience, knowledge, and expertise to help families and individuals in Ann Arbor, Detroit, surrounding areas, and across the country achieve their financial objectives.
The views expressed are my own opinions and do not apply to every situation. Your situation may vary so make sure to consult a professional for advice prior to making any decisions.
Depending on one’s individual situation, a [commission-based/ fee based account] may not be suitable for all investors. Speak with a Financial Advisor to determine the most appropriate financial account for you, given your financial circumstances. There is no guarantee a [commission-based/fee-based account] will outperform a [commission based/fee-based account].
Advisor has no affiliation with the state of Michigan.