Do you know how your financial advisor is paid? Unfortunately most individuals are left in the dark when it comes to the true cost of the financial advice they receive.
Independent advisors and planners earn commissions, fees, or a combination of the two. It’s important to understand how each of these pay structures work since they can affect the type of advice you receive.
Many financial advisors are paid by commissions from the products and services they sell. This leads to inherent conflicts of interest and often hides the true, total cost of advice. Anyone offering “free advice” probably earns a living from commissions.
Be leery of an advisor that says something like, “You don’t pay me anything! The investment (or insurance) company does!” The company whose products and services you use has to get the money somewhere, so you’ll probably end up paying higher fees, earning lower returns, or a combination of the two.
The majority of financial advisors are “fee-based.” This means they earn money from fees billed to clients as well as from commissions paid by the products and services they sell. Although the fee might lead to a more in-depth financial plan than you’d get from an advisor that only earns commissions, the conflicts of interests from sales commissions are still present.
The only way to make sure your advisor won’t be influenced by commissions is to work with a “fee-only” advisor. Fee-only advisors are paid directly by their clients and do not accept any third-party commissions or fees. The cost of their advice is completely transparent.
The mission of a fee-only advisor is to give you advice, and direct you to the low-cost, high-quality, commission-free products and services that are best for you. Also, since fee-only advisors don’t have to sell you anything to make money, they’re able to give you advice on any area of your finances, including rental real estate, business assets, and more.
My goal in writing this is to make sure you’re an informed investor. Although there are excellent advisors that accept commissions, you should be informed of the pitfalls of this compensation model and the alternatives available.
Ask your advisor how he or she is compensated and ask for the true, total cost of any recommendations – including any commissions he or she will earn – in writing. Ask for full disclosure and expect nothing less!
When it comes to the true cost of advice, what you don’t know can hurt you!