What You Probably Don't Know
The financial industry as a whole is very cloak and dagger when it comes to explaining how we actually get paid. It can be confusing because sometimes an advisor works for an insurance company, other times a Wall Street broker/dealer, or sometimes a small independent firm. What advisors all have in common, regardless of credentials and experience, is that we all call ourselves Financial Advisors, or when we want to sound cooler, Wealth Managers.
Furthermore, most of the time we’ve been taught not to discuss how we get paid. Sound a little shady? I think so too.
So let’s change that. Some advisors charge you directly for their advice, while some appear to be offering their service for free. I can’t tell you how many times I’m told, “my advisor doesn’t charge me.” Trust me, nobody works for free. I am certainly biased on which form of compensation that I think is best for the advisor and for the client, but according to industry regulators, none of these compensation methods are considered unprofessional, wrong, or deemed to be better than the other. That being said, I also believe most advisors try to keep the client’s best interest in mind and anyone providing a service should get paid. However, the biggest problem is not the type of advisor compensation. The biggest problem is that we, as an industry, don’t discuss our fees openly with people. And people are afraid to ask.
Most advisors are required to adhere to both state and federal regulatory requirements. In most instances, the rules dictate that advisors must discuss and disclose his or her compensation with potential clients. Unfortunately, the discussion usually doesn’t happen and the disclosure is on page 89 of a 200 page document. The reality is that most investors have no idea how or how much they pay their advisor.
Side note: In defense of advisors everywhere, and even myself in my early years, some of the companies compensating us make the pay structure extremely complex. For example, when I first started out, part of my orientation at my first employer was to attend a 2-hour presentation on how I would be paid. That evening I went home and my wife asked me, “So how does it work? How do you get paid?” I said, “I have no idea,” as I handed her the 2-inch stack of papers supposedly explaining my compensation. It was as clear as mud. True story. Talk about cloak and dagger.
The Scoop
It’s important to understand the different ways advisors get paid, so you can make an informed decision about which type you prefer. In the interest of simplicity, I will cover the top three compensation methods.
1. Commission only: Some in our industry receive commissions for selling financial products, like mutual funds or insurance policies like annuities and permanent life insurance. Most of the time, these are new advisors that are affiliated with an insurance company, like Mass Mutual, AXA, New York Life, or Northwestern Mutual. I started my career under this type of compensation method and quickly realized it wasn’t the place for me.
2. Commission and fees: Now this is where it gets a little tricky. The industry calls this method fee-based (notably different than fee-only, which is explained below). Examples include advisors of companies like Ameriprise, Edward Jones, and Merrill Lynch. These advisors have the option to get paid like fee-only advisors (see below)… BUT they can also receive commissions when they sell you an annuity, can receive kick backs or load fees from mutual fund companies for investment products they recommended in your “fee-only” financial plan.
When it comes to the products that they recommend, it's only required that what they recommend be suitable for you at the time it is sold. It’s called the suitability standard. What that really means is the broker-dealer that employs the advisor has to reasonably believe that any recommendations made are suitable based on the client's current financial needs and objectives.
Now if you have multiple financial products that are deemed suitable by the employer, and some of those products pay you more than others, which product do you think you are going to be likely to recommend to your client? Can you imagine going to a doctor who only gives you medical care that is suitable? It would be like a doctor receiving commissions by prescribing certain drugs. It’s illegal because it’s a major conflict of interest. And I don’t know about you, but I want the care that’s in my best interest at all times.
3. Fee-only: Fee-only advisors (NOT fee-based), or fee-only financial planners, operate as fiduciaries. "Fiduciary" means an advisor must legally give advice that is in the client's best interest. You might assume all financial advisors have a requirement to give advice that is in their client's best interest, but unfortunately that's not true. Fee-only financial advisors may be paid hourly, a flat fee, by retainer, as a percentage of assets (AUM), or in a combination, depending upon the planner or advisor you choose.
So how does it work at Convergent?
We serve our clients through a fee-only relationship. Depending on the client and the service they are looking for, these are the ways we get compensated:
1. Investment advisory fee: this is charged as a small percentage of the assets we manage and invest for a client. If you have an account held outside of your company 401k plan, chances are you are paying someone this fee already, whether you realize it or not. Our fee varies based on the dollar amount we are managing for a client, but something I’m really proud of is that we do not require a minimum investment to work with a client.
2. Planning fee: this is broken up into monthly payments for client convenience and is charged for financial planning that includes things like retirement savings, other financial goals, college tuition planning, debt management, monthly budgeting, appropriate insurance coverage, legacy planning, etc. This fee is reduced when assets are invested with Convergent and is waived entirely for all clients who have $250k+ invested with us.
If you want to get your financial house in order, develop a retirement plan, or start saving for your kids' college education, I want to help you. That’s why I’m committed to “keepin’ it real” and making sure you know how you’ll be paying me. If you want to know more, schedule an intro meeting or call with me today by clicking here.
P.S. If you aren't sure how your advisor gets paid, shoot me a quick email and I can help you figure it out.