Advantages of fee-only advisors
I understand that researching investments is not an easy task and your time is more valuable elsewhere, therefore you choose to hire someone to do it on your behalf. The decision to hire a financial advisor brings a whole new set of questions to the forefront.
Hiring a financial advisor can cause a considerable amount of anxiety; after all, it’s your hard-earned money we’re talking about here. It’s important to seek out somebody who thinks critically, treats this specialized work as a highly-skilled craft, and seeks always to improve. Although not all financial advisors are the same, it’s a general term that can mean many different things and come in many different forms.
In the world of Financial Services, specifically Investment Services, financial advisors can come generally in two distinct forms: broker and investment advisor. The term “broker” and “investment advisor” may seem synonymous, but they have significantly different motivations because of the way they get paid.
Compensation trends to drive motivation, so it’s important to understand the difference between the commissions-based broker and fee-only investment advisor. How your adviser is compensated is an important factor in determining what kind of advice you’ll receive. Building relationships means building trust and being up front and transparent is critical.
The way one is compensated has a dramatic impact on the advice given. Motivations between parties can vary dramatically and may not always be aligned. Some people just want to close a sale and make some quick bucks. Some – whether a broker or an advisor – choose to educate and inform and inspire, encourage you to reach higher, and provide a valuable service that develops into an ongoing process.
In both cases, fee-only or broker/dealer, you pay for the advisor’s services. Either way, as an investor seek advice from someone you know and trust.
Fee-Only Financial Advisors and the Fiduciary Standard
As a Fee-Only financial advisor – one small fee based solely on a percentage of assets managed – I charge my clients directly for my advice and the on-going management of their assets. Fee-Only financial advisors must be completely transparent in our fees so you will always know what you are paying us. We receive no other financial reward from any other source.
This means we never receive referral fees or commissions, and therefore have no incentive to push one product over another. We simply advise on the what’s the best investment for your situation. This compensation structure aligns our goals with yours, which is to focus on the indented goal of growing your wealth.
This unique way in which we are paid allows us to be objective in our advice and avoid possible conflicts of interest. As a fee-only registered investment advisor (RIA) we are held legally to a Fiduciary Standard, which means by law we have to hold your interests above our own.
Era Capital Management, for example, does not receive compensation from any source for directing you to the purchase or sale of any specific security or product. Our only source of compensation is fees paid by clients.
Commission Based Financial Advisors and the Suitability Standard
When working with a commission based advisor, you never pay fees directly to the advisor. Instead you pay the insurance companies and mutual fund companies whose products the advisor sells. Those costs come in the form of various sales-charges (loads, front and/or back), commissions, and ongoing management expenses.
The financial companies then pay part of this to the advisor. In the investment world these commission-based advisors commonly are known as Broker/Dealers. They are, in essence, financial salesmen because their goal is to sell you products which in turn provides them with their sales commission.
There is no inherent problem with a broker/dealer getting paid. The potential problem lies in the possibility of a conflict of interest between the respective welfares of the client and the advisor. A given product might not be good for one or the other.
The commissions provide an incentive to sell products with the highest payout to the advisor (e.g. loaded mutual funds, variable annuities, whole life insurance) regardless of whether they are the best option for the client.
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