I now work with a commission based planner and I know their are many hidden fees. How do the fees balance out compared to each other?
What are the pros and cons of working with a fee based financial planner vs a commission based planner?
Great description of the differences by Curtis! I would expand on his two questions by a couple:
- Is this product the best option for my circumstances, or the best available to you?
- How would your recommendations change if ______________ (use the realization of your primary financial goal - i.e. debt paid off, raise at work, relationship status change)?
- How much will you and your firm be earning from my account annually?
- What can I expect from you and your firm in support of my account?
- How frequent and what type of communications?
- Account access options for "self-service"?
- Commitment to responding to messages from you?
- Other services/programs available or included in relationship (education events, etc.)?
Hope that helps you evaluate your current relationship...if you have any other specific questions, please do not hesitate to ask. I will provide insight for anyone, without cost or obligation...sometimes the best guidance you can get is from someone "in the business" but NOT soliciting your business!
I agree with Curt and Jeffery and would like to add a few more things to consider since I've been on both sides of the fence. I started my career 12 years ago at what is now Ameriprise and now have my own fee-only firm. Some of the best advisors I know are fee+commission, so I don't think "how" the advisor gets paid is as important as the breadth of advise he/she will provide and whether or not they are a fiduciary on your behalf. If paying off your credit card debt or investing in a rental property is best for you, the advisor should tell you this... even if they would make more money by managing your money or selling you products. In many cases, it IS best that they manage your money or sell you products that you need, but they should also advise you on things like debt, cash-flow, employee benefits and non-investable assets where they don't make a dime (unless they recommend to invest more with them or rollover an old account).
Many advisors go into the financial advisory business as a commission or fee+commission (fee-based) advisor with the best intentions. They usually receive great training in the products they sell... but little to no training in the things they don't sell. So, of course, when the only tool you have is a hammer everything looks like a nail. This is why it is important that you work with a Certified Financial Planner. The CFP curriculum is broad-based and emphasizes the inter-connectivity of most every aspect of someones financial life.
For example, before I went through the CFP curriculum I never, ever recommended or even reviewed anything to do with someone's auto, homeowner or renter insurance (known as Property & Casualty). This was primarily because I didn't know ANYTHING about P&C! Now, I normally recommend umbrella policies to almost everyone, even though I'm fee-only and don't sell any products.
One last thing. I think it is VERY important that you work with someone with whom you feel comfortable being yourself since it will hopefully be a very long relationship though all of your highs and lows. If you feel comfortable video-chatting from your own home or office, why work with someone who requires you and your significant other to take off work during the workday and meet them in their own office? Or, if you feel that it is important your advisor have a top-floor office suite with a view, I wouldn't suggest you work with someone who works from home.
Ah…the age-old debate between commissions and fees! To really understand the difference, realize that in the investment business there are not one, but two distinct business models:
1) securities sales, and 2) financial advice.
A security salesman may call him/herself a financial advisor, a financial planner, a "fee-based advisor" or any other number of other titles, but the fact is that a security salesman is not being paid to give advice. The proper titles for a salesman include stock broker, registered representative, or insurance agent. Like any salesperson, he/she is being paid a commission to sell a product for a financial institution. The salesman must be a registered representative
of the institution; so an easy way to identify a salesman is to look on his/her
business card, website, or yellow page advertisement for that term. If you see the term "registered representative", you are dealing with a salesman, regardless of the title he/she uses.
Your salesman may be attempting to do the very best he can for you; most do. But there is a
problem: he doesn’t work for you. He works for, (and is paid by) the institution he is registered with. That institution is likely to reward him most for selling products that are highly profitable for the firm. Those products tend to be the most expensive products for you. An unscrupulous salesman may sell the products that pay the highest commissions: notorious in this area are limited partnerships, non-traded REITS, fixed and variable annuities, and permanent life insurance policies. Not coincidentally, these products tend to be illiquid, subject to surrender charges if not held for a number of years, and with high internal ongoing costs.
Some salesmen may frequently buy and sell stocks or bonds within your account as a way to generate commissions. This practice, known as “churning” is detrimental because of the cumulative costs.
But the biggest problem with a commissioned salesperson is that most of them give biased and inferior financial advice. They are not paid to give advice, and their judgment is clouded by their end goal of selling a product. As they say, “You get what you pay for”, and with a salesman, you get a product.
If you want advice, hire an advisor. An advisor is paid to give advice, not to sell a product. I would look for the term “fee-only” to insure that you are truly dealing with an advisor. An advisor works for you, not for an institution. You pay the advisor directly for advice, and you do not pay commissions, because the advisor does not sell products at all. Instead of selling products, an advisor buys securities for you. The conflict of interest inherent in commissioned sales is gone; an advisor generally is paid a fee based upon the size of your account. You are both motivated to have the account grow; when you prosper, your advisor prospers; when you suffer, your advisor suffers.
The advisor is financially motivated to help you succeed, and that includes selecting securities that are low in cost. In my experience, investors who rely upon salesman pay on average more than 2.5% per year for their investments when all components of cost are added together (loads, 12b1-fees, turnover costs, and cash drag). A cost-conscious advisor who uses a passive strategy is likely to cost less than half of that, even when the fee for advice is included.
The value of advice goes beyond investment selection. A competent advisor will give valuable advice in all the major areas of a financial plan: cash reserve and liability management, savings and withdrawal rates, education planning, advanced income tax strategy, projections to determine feasibility of retirement, insurance evaluation and estate transition. Most importantly, an experienced advisor can act as your “behavioral coach”, preventing you from making costly mistakes such as market timing and holding concentrated positions. This comprehensive financial planning advice is often a bigger factor in your success than anything else.
In summary, I advise you to retain the services of a fee-only advisor.
There is a cost to everything.
There is nothing wrong with using a commission based planner. Just make sure you know how they get paid the costs of any product recommendations. The problem is that commission planners are usually not brokers, so they may be limited in their product selections.
A fee planner still uses products that have undisclosed fees. But those fees are not really known - trading costs, bid ask spread, etc. But the commission planner has the same limitations.
What you have to watch out for is surrender costs, if you bail early. These are known and disclosed.
If you like the planner, don't worry. But get the full story.
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