Is your financial advisor dangling a carrot on a stick? Or, are you walking hand-in-hand in solidarity as you chart your financial future? Maybe the difference isn’t that clear. As more investors are opting for fee-based financial advising services, it’s time to start asking questions. Why are we second-guessing the traditional financial advising model? What motivating factors are at play? How can you make the right choice for your individual financial portfolio?
The fundamental difference between traditional and fee-only financial advisors is the method of compensation.
• Fee-only advisors accept compensation for their services from the individual investor. The fee structure ranges from a flat annual fee to a percentage of the portfolio under management.
• Traditional or commission-based advisors earn a commission based on sales of securities.
If designing a strategic portfolio allocation wasn’t confusing enough, deciphering the motivations behind your advisor only adds to the challenge.
Who’s dangling the carrot?
At first glance, fee-only advisors appear to be more neutral, whereas a traditional FA’s recommendations easily appear to follow commissions. Compensation and motivation are fiercely intertwined, often making it difficult for the investor to discern the difference between the two. Fund performance aside, investors are often left with the question as to why one vehicle comes so highly recommended over another. Where does the advisor’s fundamental loyalty lie…with the investor or with the fund?
Fee-only FA’s must fulfill a true fiduciary role; as an independent advisor they recommend investment plans in your best interests. Traditional advisors are guided by suitability; identifying financial vehicles that are suitable for your goals and risk tolerance but also favorable in terms of commission payout.
Do you have a game plan for after the game plan?
Before opting for a fee-only advisor, investors should assess their options for implementing their advisor’s recommendations. Traditional financial advisors hold licensures that allow them to sell securities, and fee-only advisors often do not. Are you prepared to put your own plan into action by leveraging a discount brokerage service? The investment of your own time becomes a critical issue.
Who said size matters?
Investors must also review their advisor’s overall qualifications, licensures and past performance. Fee-only financial planning is regulated the same way that commission-based advising is. Investors often opt for fee-based advisors who are lawyers, accountants or professionals with exceptional professional designations in or related to the financial industry. Each of these qualifications delivers and implied guarantee that the advisor will follow the standards for the industry- in terms of professional expertise and business ethics.
The fees charged by fee-only advisors are not an absolute indication of their skill level. The fee may be based on a flat percentage of assets under management or it may be an hourly rate set by the advisor. Ultimately, the fee is a reflection of the value that the advisor places on his or her time and not necessarily a function of their skill or experience level. Larger fees do not guarantee quality of service or performance. Traditional advisors can’t make those guarantees either.
Ultimately, there is no guarantee on results. It’s up to the advisor – no matter the compensation model- to earn your trust and to manage your assets for growth over the long run. Savvy investors are aware of the compensation differences – and motivational forces – at play and they demand transparency from the start.
IncBlot is a consultancy that specializes in applying the field of psychology specifically to the world of financial services. Please be in touch if we can assist with your training, speaking and consulting needs around behavioral finance, practice management or a host of other topics.