Skip to main content

Tag: Fee Only

The Big Difference Between a Fee-Only & Fee-Based Financial Advisor

Written by support@seostats.com on . Posted in Fees, Fiduciary.

How is your financial advisor compensated? This should be at the top of your considerations when selecting a financial professional.

As you might imagine, there are different compensation models for financial advisors and how a financial advisor gets paid tells you a lot about the type of service you can expect. Understanding the difference between fee-only and fee-based compensation models is something every investor should care about because this small distinction immediately tells you a about an advisor’s conflicts of interest.

Here’s more on what makes fee-only financial advisors different from fee-based financial advisors.

 

Fee-Only Financial Advisors

They are legitimately fee-only. Just like it sounds in the language, fee-only financial advisors are paid from the fees they charge. Importantly, they are only compensated by fees from the client. Typically, fee-only financial advisors charge either an hourly rate, a percentage on the assets they manage, a flat fixed fee, or some combination. Some fee-only financial advisors charge a flat fee for financial planning and then a percentage fee for the assets they manage as an example. The bottom line: fee-only financial advisors don’t, and will never, try to sell you financial products.

They have limited conflicts of interest. No one is conflict free. An advisor who charges a percentage fee based on the assets he or she manages will still be incentivized to gather as much of his or her clients’ assets as possible. However, fee-only financial advisors are registered investment advisors (RIA) who are held to the highest fiduciary standard, meaning they must do what is best for their client. Because fee-only financial advisors do not sell financial products, they are not motivated to recommend a financial product to you based upon a potential kickback.

They can offer a wider array of services. Fee-only financial advisors can generally choose from a wide pool of investment options and recommend the one that is best for an investor’s specific situation. Without their income being tied to financial products, fee-only financial advisors can (and often do) offer comprehensive financial planning services to serve their clients needs. From retirement planning, education planning, tax strategy, and estate planning services, fee-only financial advisors usually have all areas that impact a person’s financial life represented in their service offerings.

 

Fee-Based Financial Advisors

They earn a commission. These professionals get paid when they sell certain financial products on top of the fees they charge. The fee-based model is a hybrid and can be confusing to investors who don’t understand the distinction. A good example of this fee-based compensation model is when a financial advisor offers comprehensive financial planning services and is also licensed to sell insurance products. They may only charge a fee on the financial planning and investment services, but they earn commission on the insurances they sell.

They aren’t held to the Fiduciary Standard. Simply put, fee-based financial advisors are not held to the highest standard required by law for financial advisors to serve their clients’ best interests at all times. This has become even more evident in light of the recently voided DOL Fiduciary Rule that doesn’t’ require fee-based financial advisors to adhere to the same fiduciary standard. The good news is that the Securities and Exchange Commission (SEC) is now working on their own version of the rule (see The SEC chairman said brokers would no longer be able to base advice on what makes them the most money.”) but I am not holding my breath. They may be honest professionals who believe they are doing right by their clients, and maybe their recommendations are suitable, but the line will always be blurred when commissions are involved due to the embedded conflict of interest under such an arrangement.

 

Conclusion

When it comes to your financial well-being, who would you most trust with your personal finances? The financial advisor who has limited conflicts of interests that stand between you and what’s best for you or the financial advisor who intentionally collects a fee from you and a commission for the products he or she recommends?

How shocking is it when you hear of doctors taking kickbacks from drug companies? If the thought of a doctor writing prescriptions for any reason other than what’s in their patients’ best interest disturbs you, then think about what it would be like if it was a generally accepted practice among the medical community. Yet, that is exactly what is happening within the financial services industry.

Expect more from the financial advisor you select to worth with. You certainly deserve the highest standard of care, and you can find it be searching for a fee-only financial advisor.

Learn More

 

Lake Road Advisors, a Fee-Only, independent financial planning firm with offices in Corning, NY, Ithaca, NY and Portland, OR works with clients virtually all across the country. Paul Sydlansky, the founder of Lake Road Advisors LLC, has worked in the financial services industry for 20+ years. Prior to founding Lake Road Advisors, Paul worked at Morgan Stanley in Manhattan for 13 years. While at Morgan Stanley, Paul was a senior-level manager within the Institutional Equities Department. In 2018 he was named to Investopedia’s Top 100 Financial Advisors list. Paul received a Bachelor’s degree in Economics from Marist College and holds an MBA from New York University Leonard N. Stern School of Business. Paul is a CERTIFIED FINANCIAL PLANNER™ and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN).

Understanding Your Fee Schedule

Written by support@seostats.com on . Posted in Fees.

For most items or services you purchase, as a consumer, price tends to be pretty straight forward.  If you need a gallon of milk you can go to a supermarket, drug store, or gas station and know immediately how much the milk is going to cost you.  Understanding how much you are paying for a specific product or service, is usually a straightforward process.  Unfortunately, when it comes to hiring a financial advisor, pricing can be complex.

Last week, Betterment, the asset manager I use for my clients, published a “Quick Guide” to compare the costs associated with different asset managers.  This is a must read for anyone who invests.  While this guide does a great job of breaking down the investment fees you will incur across different platforms, it is only part of the story.

To help you better understand your fee schedule, I have a listed a few questions you should consider asking your advisor:

 

What services do you provide?  Investment management?  Financial planning?  Insurance sales?

The prices in this guide are for investing only. What this chart outlines is the fee associated with purely investment management, which is only helping you pick stocks, bonds, and make allocation decisions.

Investing is an important aspect of your financial plan, but it is only one part. Comprehensive financial planning is not included as a service in the “Quick Guide” examples.

 

Can you explain your fee structure?

Once you understand the specific services you are receiving the next step is to understand the associated fees. When I meet with a prospective client and we discuss my fees, I always ask what they are currently paying their advisor.

They usually go back to their current advisor and ask the question, “What is my fee schedule?”  Here is where the current advisor explains the management fee (usually 1%) and points them to the account statement to show the funds coming out quarterly.

Now it gets tricky.  Technically, the client may only be paying their advisor 1%, however, that is often only part of the fee.  If you hold any mutual funds or exchange traded funds in your account, you are also paying the company that manages the mutual fund or exchange traded fund product that you own.  The fee you pay these managers is called the expense ratio.  According to Morningstar, the average mutual fund expense ratio in 2014 was 1.19%.  Investors rarely see these fees coming out as these are commonly paid by a reduction in the fund share price.

In addition, investing in stocks, bonds, or mutual funds will often include transaction costs.  These are the costs incurred, by the investor, to buy and sell securities.  Transaction costs are not included in the management fee charged by your advisor.

Lastly, how is your advisor being compensated for the planning work and advice they provide?  Is it a flat fee amount? Is it an additional % of the assets?  Are you being charged hourly?

 

Do you receive any incentives for selling me specific investments?

I spoke about this topic a few weeks back in my blog post “Incentives Matter.”  This doesn’t mean that the investment they are suggesting is wrong for you, but wouldn’t you want to know if your advisor was financially motivated to sell you a particular product?

Anyone who provides financial advice (investment advisors, financial planners, brokers, financial advisors) should be transparent with their fee schedules and the corresponding services they offer.

Clearly understanding your fee structure is a critical part in evaluating the services you receive.

 

Looking for an Advisor? Read our free whitepaper “The Ultimate Guide for Choosing Financial Advice” to learn the questions you should be asking!

Incentives Matter!

Written by support@seostats.com on . Posted in Fees, Fiduciary.

In last week’s Wall Street Journal, one of my favorite writers, Jason Zweig, wrote an article entitled “Mutual Fund Fees: A Bad Incentive Fades Away” which highlights a known conflict of interest that exists in the financial services industry where advisors are paid by mutual fund companies to sell their proprietary products over other funds.

This payment could soon disappear with the Department of Labor’s expected move to the “fiduciary” standard and away from a “suitability” standard.

Many large brokerage firms and insurance companies are held to a suitability standard, which means they can recommend a product for you that only has to be deemed suitable, but not the best for your needs.  Registered Investment Advisors, or RIA’s, are held to a fiduciary standard which means they must recommend the best product and or strategy for you. (This video take a humorous approach but does a good job in explaining the differences)

I was recently reminded how important incentives are in all aspects of life.

On a late night trip to a walk in medical clinic, my daughter was diagnosed with an ear infection.  Pretty standard for a 6 year old. The doctor prescribed an antibiotic and she would be feeling better in no time.  The prescription was called in and we proceeded to our local pharmacy to pick it up.  While checking out I was stunned to see the antibiotics rang up to a price of $225?

I asked the pharmacist if this particular antibiotic was specifically prescribed for ear infections?  Nope.  For children?  Nope.  He couldn’t understand why this would be prescribed over a whole host of other drugs that would be 2% of the cost.

I decided to call the doctor and ask that very question.  I didn’t get through to the doctor but did get the physician’s assistant who said she would check.  Needless to say, when the PA returned to the phone she had already called in a new prescription for another antibiotic that was the same but cost $4.  When I informed the pharmacist about this he snickered and mentioned that the doctor must have been incentivized to prescribe this particular medicine.

What if I hadn’t know any better?  How often does this happen?

This doesn’t mean all doctors do this but like financial advisors, incentives do matter. In this case, the prescribed medicine was perfectly suitable for my daughter but I would have paid an extra 5525%!

This is an extreme example, however, as Zweig points out in his article, “Until advisers are paid solely by their clients, no one will be able to tell whether the advice is tainted”.