The financial industry, of which I’m a part, has many regulations. A handful of them have to do with how advisors are compensated. There are two primary methods of compensation that I’ll fill you in on during this episode. It’s important because the way your advisor is compensated can have a bearing on the type of advice they provide to you. It sounds a bit odd to say it that way, but it’s simply true. Listen to get all the details.
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Two ways that financial advisors are paid
One form of compensation for financial advisors is through commissions. Like any other profession where selling is involved, the payment to the seller (the financial advisor) is based on the price of the product that is sold. I’m not making any comments about the right and wrong of this approach, I’m just telling you how it works.
The second form of compensation is what’s called “Fee based” In most scenarios, the fee charged to clients depends on the amount of assets they manage for the client. This amount is referred to as AUM (assets under management). So if you have $100,000 being managed by your advisor and they charge a 1% fee, then the annual fee paid to your advisor is $1,000.
And the interesting twist to all of this is that a given advisor can be paid in both of those ways, depending on the scenario. But an advisor can only call themselves “fee only” IF they don’t provide any commissionable products. So if they do so, they are limiting their options.
There is actually one additional or “different” way that advisors can be paid
This approach is what I consider to be a “flat fee” advisor compensation model and it’s the approach I take at my practice, Forward Thinking Wealth Management. There aren’t very many of us around who set up our fees this way. We don’t charge based on things outside of our control (like the way the market performs or doesn’t perform), and we don’t charge commissions, ever. Instead, we charge based on our knowledge and experience and the fee is the same for each service we offer, across the board.
Because of all this, here’s the question you need to ask your advisor
To clarify what I’m encouraging you to ask your advisor, let’s go back to that scenario where your current advisor manages $100,000 for you. When you approach retirement, you should have things like employer 401(k) plans that you may need to transfer to your financial advisor. If he/she is charging you a 1% fee for managing your funds, and you move a $900,000 401(k) to them, your annual fee is going to jump from $1,000 to $10,000 overnight.
So here’s the questions you should ask them in a scenario like this…
“If the fee you charge me increases by $9,000, how will your services on my behalf increase in value by $9,000 to warrant that increased annual cost?”
I’ve never met an advisor who can answer this question to a client’s satisfaction. It just doesn’t make sense if fees are structured this way.
This week’s FLASHBACK:
As you can tell from my previous flashbacks, I love Christmas trees. And I’ve got lots of stories from my past about how my family has selected them each year. This episode, I’m telling the story of how we bought our first artificial tree… and why.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.