There is a simple but undeniable truth in the financial consulting and wealth planning industry that Wall Street has kept as a "dirty little secret" for years. That dirty little, and nearly always overlooked secret is the WAY YOUR FINANCIAL EXPERT IS PAID DIRECTLY AFFECTS THEIR FINANCIAL ADVICE TO YOU!
You want, and deserve (and consequently SHOULD EXPECT) fair financial advice in your needs. But the fact is 99% of the general investing public has no idea how their financial expert is compensated for the advice they provide. This is a awful oversight, yet an all too common one. There are three basic compensation models for financial consultants -- commissions based, fee-based, and fee-only.
Commission Based Financial Expert -- These consultants sell "loaded" or commission paying products like insurance, annuities, and loaded mutual funds. The commission your financial expert is earning on your transaction may or may not be exposed to you. Jeff Larson Wealth Management I say "transaction" because that's what commission based financial consultants do -- they facilitate TRANSACTIONS. Once the transaction is over, you may be lucky to know from them again because they've already earned the bulk of whatever commission these were going to earn.
Since these consultants are paid commissions which might or may not be exposed, and the amounts may vary based on the insurance and investment products they sell, there is an inherent conflict of interest in the financial advice fond of you and the commission these financial consultants earn. If their income depends on transactions and selling insurance and investment products, THEY HAVE A FINANCIAL BONUS TO SELL YOU WHATEVER PAYS THEM THE HIGHEST COMMISSION! That's not saying there aren't some honest and honourable commission based consultants, but clearly this identifies a conflict of interest.
Fee based Financial Expert -- Here's the real "dirty little secret" Wall Street doesn't want you to know about. Wall Street (meaning the firms and organizations involved in buying, selling, or managing assets, insurance and investments) has completely blurred the lines between the three ways your financial expert may be compensated that 99% of the investing public believes that hiring a Fee-Based Financial Expert is directly related with "honest, honourable and unbiased" financial advice.
The truth is FEE-BASED MEANS NOTHING! Think about it (you'll understand more when you learn the third type of compensation), all fee-BASED means is that your financial expert can take fees AND commissions from selling insurance and investment products! So a "base" of their compensation may be tied to a portion of the assets they manage for your benefit, then the "icing on the cake" is the commission income they can potentially earn by selling you commission driven investment and insurance products.
Neat little marketing trick right? Lead off with the word "Fee" so the general public thinks the compensation model is akin to the likes of attorney's or accountants, then add the word "based" after it to cover their tails when these consultants sell you products for commissions!
FEE ONLY Financial Expert -- By far, the best and fair way to get financial advice is via a FEE-ONLY financial expert. I stress the word "ONLY", because a truly fee ONLY financial expert CAN NOT, and will NOT accept commissions in a form. A Fee-ONLY financial expert gets FEES in the form of constant compensation, project financial planning, or a percentage of assets managed for your benefit.
All fees are in monochrome, there are no hidden forms of compensation! Fee-Only financial consultants believe in FULL 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 consultants also -- they earn fees AND commissions! Hence -- FEE-BASED MEANS NOTHING! There is only one true way to get the most fair, honest and honourable advice possible and that is via a financial expert who believes in, and practices, full disclosure.
Commission and Fee-Based financial consultants typically 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 hard.
Consider for a moment you need to buy a truck for towing and hauling heavy loads. You go to the local Honda dealership and talk to a merchant -- that merchant asks what type of vehicle you have in mind and shows you their brand of trucks. Of course, fot it merchant who gets a commission when you buy a truck -- ONLY HONDA has the right truck for you. It's the best, it's the only way to go, and if you don't buy that truck from that merchant you're crazy!
The fact is Toyota makes great trucks, GM makes great trucks, Dodge makes great trucks. The Honda may or may not be the best truck for your needs, but the merchant ONLY shows you the Honda, because that's All the merchant can sell you and make a commission from.
This is just like a commission based financial expert. If they sell annuities, they'll show you annuities. If they sell mutual funds, all they'll show you is commission paying mutual funds. If they sell life insurance, they'll tell you life insurance is the solution to all of your financial problems. The fact is, when all you have is a hammer... everything looks like a nail!
Now consider for a moment you hired a car buying expert and paid them an appartment fee. That expert is an expert and stays current on all of the new vehicles. That advisor's only bonus is to find you the best truck for you, this hauls the most, tows the best, and is clearly the best option available. They earn a fee for their service, so they really want you to be happy and refer your family and friends to them. They get special arrangements exercised with all the local car motorbike shops 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 just like 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 only bonus is to keep you happy, to earn your trust, to provide perfect financial advice and guidance using the best investment tools and planning practices.
So on one hand you have a car merchant who's going to earn a commission (coincidentally the more you pay for the truck the more they earn! ) to sell you one of the trucks off their lot. On the other hand, you have a trusted car buying expert who shops all of the vehicles to find the most suitable one for your specific needs, and then because of his relationships with all the car dealers can also get you perfect price on that vehicle. Which will you prefer?
Truly fair financial advice and guidance comes in the form of Fee-Only financial planning. You know exactly what you're paying and what you're getting in return for the compensation your Fee-Only financial expert gets. Everything is in monochrome, and there are no hidden agenda's or conflicts of interest in the advice fond of you by a true Fee-Only financial expert!
The fact is unfortunately less than 1% of all financial expert professionals are truly FEE-ONLY. The reason for this? There's a clear and substantial inequality in a financial advisor's income generated through commissions (or commissions and fees), and the income a financial expert gets through the Fee-Only model:
Example #1 -- You just changed employment and you're running over a $250, 000 401k into an IRA. The commission based expert may sell which you variable annuity in your IRA (which is a very poor planning tactic in most cases and for many reasons) and earn a 5% (or many times more) commission ($12, 500) and get a regular, or "trailer" commission of 1% (plus or minus) comparable to $2, 500 a year. The Fee-Only financial expert may charge a fee for retirement plan, an constant fee, or a percentage of your collection to manage it. Let's say in this case you pay a $500 retirement plan fee and 1. 25% of assets managed (very common for a Fee-Only financial expert in this situation). That expert gets $500 plus $3, 125 ($250, 000 * 1. 25%) or TOTAL COMPENSATION of $3, 625 -- LESS THAN THE $15, 000 THE COMMISSION (or Fee-Based) financial expert earned! In fact it takes the Fee-Only financial expert over four years to earn what the commission (or fee-based) expert earned in one year!
Example #2 -- You're retired and building a $750, 000 home egg cell which needs to give you income for the rest of your life. A fee-based financial expert 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 of 4% or $16, 000 and the fee-based managed mutual fund collection may cost 1. 25% for total compensation of $20, 375 first year (not including the "trailer" commissions). The Fee-Only expert might shop low load annuities for you, possibly put the entire collection into a managed account, possibly look at city and county bonds, or any other variety of options available. It's hard to say how much the Fee-Only expert would earn as their largest bonus is to keep you the client happy, and provide the best planning advice and guidance possible for your position. BUT, in this case let's just assume that a managed mutual fund collection was implemented with an averaged cost of 1% (very common for that level of assets), so the Fee-Only financial expert gets roughly $7, 500 a year and it takes that financial expert FOUR YEARS to earn what the fee-based financial expert earned in one YEAR!
The prior examples are very common in our financial advisory industry. It's unfortunate that such a inequality in income exists between the compensation models, or there would probably be many more truly independent and fair Fee-Only financial consultants today!
Now consider for a moment which financial expert will work harder for you After the initial services an planning? Which financial expert must consistently earn your trust and add value to your financial and investment planning? It's obvious the financial expert with to lose is the Fee-Only expert. A Fee-Only financial expert has a direct loss of income on a regular basis from losing litigant.
The commission or fee-based financial expert however has little to lose. 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 commissions they're going to make giving you as a client. They have little to gain by continuing to add value to your financial and investment planning, and little to lose by losing you as a client.
Wouldn't you prefer a financial advisory model where your financial expert must continually earn your trust and add consistent value to your planning?
It's clearly more difficult to earn a living and run a profitable financial advisory firm through the Fee-Only financial planning and guidance model. For this reason, most financial consultants take the simple way and sell products for commissions and charge fees on assets managed -- that way they can make a nice living on your investment collection and still have an ongoing stream of revenue every year. For this reason also, less than 1% of financial consultants are truly Fee-Only, yet it's that 1% that is truly objective and fair, and that 1% whoever only bonus is to manage your financial plan, investments, and overall wealth to accomplish the goals you need to achieve!
The real "dirty little secret" Wall Saint. has is the undeniable truth that the commission and fee-based financial advisory model has inherent conflicts of interest, and your expert may be "selling you investment products" rather than "solving your financial problems"!
Greg Phelps is a CERTIFIED FINANCIAL PLANNER (TM) and Retirement Financial Expert in Nevada and Henderson, Nevada focused on delivering clients exceptional financial advice and assistance with a Fee-Only basis. Greg has 14 years of financial advisory experience and is an accomplished expert, author, and speaker. Greg worked as kitchen staff for just two of the largest investment banking firms on Wall Street -- Morgan Stanley and Goldman Sachs, as well as serving as the Regional Manager of Wealth Management at the 6th largest accounting firm in the country -- RSM McGladrey.