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Sep 18, 2015

How is your advisor paid? Part 1


Are “Financial advisors” are working for clients? 

Why does it matter to me how my advisor is paid??

How do you know if you are being given good advice or sold a product?

Can you trust someone whose interests aren’t aligned with yours?

 

STOP going with the flow and find out how the people you trust with your savings are paid.

 

Are "Financial advisors" are working for clients?

      Why does it matter to me how my advisor is paid?

      How do you know if you are being given good advice or sold a product?

STOP going with the flow and find out how the financial advisors you trust with your savings are paid.

 

There are 3 segments to the financial advisor industry and they all get paid differently:

  • Mutual fund industry - Advisors are paid on commissions
  • Investment advisory industry - Advisors are paid a % fee based on assets
  • Financial planning industry - Advisors are fee-only (hourly, project, annual fee)

For a summary of these three industries click here 

 

How do commissions work? Mutual fund advisors or financial advisors receive commissions on products they sell, much like a TV salesperson. The products are investments. When you purchase an investment a MER is automatically deducted.

Why is this an issue? Your financial advisor (mutual fund salesperson) is not on your side. Your advisor is paid by the fund-company with commission based on the products that your advisor sells you. They are not being paid on the advice they give you, but the PRODUCTS they sell you.

Advisors provide biased advice because they need to be paid, so they need you to buy a product. The advice will rarely be overpay your mortgage or pay down debt, that doesn’t generate commission. Adding to this bias, some products lead to higher commissions—but those products might not be right for you. Below is what ties your advisor to you versus the fund company.

Your thinking well at least I am protected by regulation. .WRONG. The mutual fund industry is self-regulated. Essentially this means that the people in the industry regulate themselves. This allows them to get away with an awful lot of behavior that is sub-standard. Chiefly, self-regulation does NOT require financial advisors to give or stipulate a minimum standard, specified quantity or quality of advice for any specific period/term.  So once you’ve purchased a product through them there is no contract that enforces quality, quantity, or term of service. It’s like renting a house without a contract to make sure the landlord looks after the place and agree how long you can live there.

 

How do fees based on % of assets work? You are charged a percentage based on assets/funds you hold in your account at that advisors firm, and that is then paid to the advisor. At the banks 50-60% of the fee is usually passed on to the advisor. At independent small firms advisors can receive as high as 100% of the fee.

Why is this an issue? Using or taking your funds out of the market is not in your advisors best interest. If you have take out funds to pay for a house, cover debt, or help your children buy their own place then your advisors fee would drop because it is a % of what you hold in an account there. Big reductions in funds cause a significant hit to your advisors pay. So it is in your advisors best interests to advise you that you “Cannot afford to do so” or that “its not a good time in current markets.”

 

How does fee-only work? You pay your advisor an agreed upon flat fee for services provided. Your advisor keeps all of the fee.

Why is fee-only is the best choice?

-       The amount of funds in your investment account does not affect your advisors pay

-       The fees are transparent (laid out in an agreement before hand)

-       No sales tactics

-       Compensation method insures your advisor works in your best interests

-       Compensation method makes you advisor unbiased

  • Your fee-only planner has no ties to large institutions to sell their products

-       The only person paying your fee-only planner is you (not big institutions paying advisors commissions)

-       Advice and education that’s not limited to investments or product specific knowledge.

-       Peace of mind you are getting honest advice