One of the absolute biggest sources of confusion in the investment world is the topic of fees. Much like paperwork and regulation, trying to figure out how and what you’re paying for financial advice is about as easy as cutting down a redwood with a herring (some of you will appreciate my reference). If you want to know how much your advice is costing you – and more importantly, what you’re getting for that advice – watch the video below and then read on.
My goal today is to iron out the wrinkles in this complicated world of fees and financial advice, all while throwing in some shameless plugs along the way.
Check out this video: https://www.youtube.com/watch?v=TcGq8CrAXrc
As I state at the end of the video, we are a NAPFA affiliated, Fee-Only Registered Investment Advisory (RIA) firm, which means we do not sell products to our clients. While the vast majority of financial advisory firms are held to a “suitability” standard, we are held to a higher, fiduciary standard. This requires us to make decisions that are in the best interest of our client, acting as their advocate, even if it means earning less revenue for the firm.
We cannot legally accept commissions from insurance, annuity, or mutual fund companies, and we refuse to take kick-backs from other professionals who refer clients to our firm. Fee-only firms have gained in popularity in the last few years due to the transparent compensation structure and because it removes the conflicts of interests associated with selling a product that pays a commission. The only way our revenue increases is when your portfolio increases in value. If you lose money, our income declines as well.
At Libertas, in addition to our very simple, transparent cost structure, we also pay for all the transaction costs to buy or sell an investment. There are no penalties to get out of investments you purchase through us, no IRA fees, no minimum account fees, and whether you need additional monthly income or a one-off withdrawal for an upcoming vacation, there are no ACH or wire transfer fees to transfer money quickly, easily, and efficiently from your portfolio to your checking or savings account. This means that when you join our family, you’re free to leave at any time, without restrictions, contracts, penalties, or “catches.” We also implement a Family Discount that reduces the total fee charged, based on the aggregate value of all family members’ portfolios.
Think about it for a minute… Let’s say the financial professional you’re working with is going through a financial hardship, maybe promised his or her spouse a new patio in the backyard, or maybe they just want to get ahead in the game of life. If you work with an advisor who has a choice between putting your money into an account that pays them a flat percentage of your investments each month – or selling you a product that pays a 7% up-front commission, which are they going to recommend? Let’s look at one example:
2.0% annual fee, billed monthly = $1,667 per-month
7.0% up-front = $70,000 up-front (plus other potentially hidden, annual fees)
What would you do? With that said, I’m not suggesting that all advisors who earn income this way would opt for the big payday at every opportunity, but wouldn’t you rather these conflicts of interest were removed from the equation altogether?
Most people don’t even realize the investments they purchased even paid their advisor a commission in the first place! I can tell you from personal experience, brokerage firms put sales quotas on financial advisors, incentivizing them to “cross-sell” products in order to generate more revenue for the brokerage firm. I say “personal experience” because we used to be a fee-based firm, but changed the structure of our company back in 2013 so as to do away with these conflicts.
Because fee-only firms have a competitive advantage over other firms, commission-based advisors have started calling themselves “Fee-Based,” but don’t be confused. All this means is they can charge a flat percentage of total money managed. However, they can still charge commissions on mutual funds, annuities, and insurance products.
Consequentially, a financial plan ends up being another sales tool used to provide more opportunities for the advisor and the firm to attain more cross-selling opportunities, product sales, and commissions. The advisor can use this financial plan (and many firms charge an additional fee for the plan – we don’t!) to show the client why they need an annuity or more life insurance, both of which the advisor can conveniently sell them without any perceived additional costs or fees. But as the old Prego spaghetti sauce commercials used to say about the high quantity of their ingredients, “It’s in there!”
How can you tell if the company you work with is fee-only or fee-based? Look for the acronym “FINRA” in their disclosures on their marketing materials, business cards, or their website. Also, look for disclosures that mention insurance companies, agencies, banking products, or FDIC insurance. If you pick up on any of these cues, then they’re not a fee-only firm.
If you want to avoid these conflicts of interest, then you want to avoid working with both commission-based and “Fee-Based” firms. Instead, limit your interviews to “Fee-Only” firms. Fee-only Registered Investment Advisory (RIA) firms recommend the best investments for their clients, not the products with the highest commissions. You can find a list of local fee-only firms to interview at www.NAPFA.org.
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If you have any questions regarding portfolio management, estate planning, or financial planning, please contact us so that we can confidentially discuss you or your company’s situation further.
The opinions mentioned in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Past performance is not guarantee of future results. Economic forecasts set forth may not develop as predicted. The views and opinions expressed in this commentary are those of Adam Koos and do not necessarily represent the views of TD Ameritrade and its affiliates. Investing involves risk including loss of principal.
Categories: Adam Koos, CFP®, CMT®, Market Commentary