WHAT IS A FEE-ONLY ADVISOR? AND WHY SHOULD YOU WORK WITH ONE?
Is your advisor suggesting an investment or purchase because it will get you closer to your financial goals -- or because they will earn a kickback commission? Financial advisors earning commissions or markups on sales are often faced with conflicts of interest — conflicts that aren’t clearly disclosed to clients.
Companies who sell annuities, life insurance contracts, or mutual funds aren’t required to send you a bill with details about the costs of the transaction. Similarly, if you purchase a bond or new stock issue, you will never receive a bill outlining your costs.
Why is that?! Why don’t most "financial advisors" want you to know how they make their money? Because they know the two most popular ways financial advisors get paid: commissions and markups — create real conflicts of interest.
There are three main ways financial service professionals are paid and only one of them consistently puts your interests first.
Companies who sell annuities, life insurance contracts, or mutual funds aren’t required to send you a bill with details about the costs of the transaction. Similarly, if you purchase a bond or new stock issue, you will never receive a bill outlining your costs.
Why is that?! Why don’t most "financial advisors" want you to know how they make their money? Because they know the two most popular ways financial advisors get paid: commissions and markups — create real conflicts of interest.
There are three main ways financial service professionals are paid and only one of them consistently puts your interests first.
HOW DO FINANCIAL ADVISORS GET PAID?
1. MOST FINANCIAL ADVISORS RECEIVE A SIGNIFICANT PORTION OF THEIR PAY IN COMMISSIONS
This is the payment model you are probably most familiar with. When you purchase shares of stock through a broker or agent, you receive a trade confirmation showing commissions you were charged for that trade. These commissions aren’t always clearly labeled, can become quite complicated, and can be hidden within other expenses. This can make it harder for you to tell who is making what — and why.
For instance, if you purchase an annuity from a life insurance agent or class B or C share mutual funds from a broker, the commission payment is wrapped into insurance product or fund expenses...where you might not notice it! Or, you are told there is a penalty period when withdrawals above a certain threshold trigger a fee. The legal term for this penalty is “contingent deferred sales charge,” but really, it’s a commission.
The insurance company or mutual fund company pays your “advisor” an upfront commission when you purchase the product and often, a smaller amount each year you continue to own that product. Penalty periods and extra fees are a way for the company to guarantee they make back the commission they paid your advisor. So-called index annuities are even better at camouflaging commissions — they withhold money they know the policy would earn if it were transparent, pay you less — and call it even.
Because advisors paid in commissions make the most money when you purchase financial products, they may be tempted to recommend buying things you don’t need.
For instance, if you purchase an annuity from a life insurance agent or class B or C share mutual funds from a broker, the commission payment is wrapped into insurance product or fund expenses...where you might not notice it! Or, you are told there is a penalty period when withdrawals above a certain threshold trigger a fee. The legal term for this penalty is “contingent deferred sales charge,” but really, it’s a commission.
The insurance company or mutual fund company pays your “advisor” an upfront commission when you purchase the product and often, a smaller amount each year you continue to own that product. Penalty periods and extra fees are a way for the company to guarantee they make back the commission they paid your advisor. So-called index annuities are even better at camouflaging commissions — they withhold money they know the policy would earn if it were transparent, pay you less — and call it even.
Because advisors paid in commissions make the most money when you purchase financial products, they may be tempted to recommend buying things you don’t need.
2. FINANCIAL ADVISORS CAN ALSO MAKE MORE MONEY THROUGH MARK-UPS
If you purchase bonds, CDs, or new stock issues through a broker, you don’t pay commissions on your trade confirmations. You pay mark-ups on the securities you are buying or bonds you are selling. A mark-up is a lot like buying an item in a store. The store buys products in bulk and sells them for a higher price. Or, if you are selling a fixed income security, mark-ups are like selling something at a pawn shop. The shop will always pay you less for your item than they think they can sell it for.
But how can you tell if the mark-up you have paid is fair and brings value? The mark-up for new issue shares of stock are disclosed in a legal document you receive called a prospectus (good luck finding it!). For bonds and CDs, the mark-up is not usually disclosed. If that makes you wonder if mark-ups are worth it, well, it should.
When advisors earn money on mark-ups, they can be tempted into pushing you to purchase more than you need or make less suitable recommendations.
But how can you tell if the mark-up you have paid is fair and brings value? The mark-up for new issue shares of stock are disclosed in a legal document you receive called a prospectus (good luck finding it!). For bonds and CDs, the mark-up is not usually disclosed. If that makes you wonder if mark-ups are worth it, well, it should.
When advisors earn money on mark-ups, they can be tempted into pushing you to purchase more than you need or make less suitable recommendations.
At Oak Street Advisors, we know there is a better way: fee-only financial services. When you work with us you never need to second-guess our recommendations and strategies. We aren’t paid by producers. We’re paid by you, and only by you. And that makes you — and your financial future — our highest priority. Oak Street Advisors committed to being fee-only financial advisors to give our clients complete confidence in our financial advice.
3. FINANCIAL ADVISORS FOCUSED EXCLUSIVELY ON YOUR FINANCIAL GOALS GET PAID ONLY IN FEES
Fees are the most transparent way to pay for professional financial services — direct payments, by check or debit, to your financial advisor for the work they do for you. Before any work begins, you and your advisor decide upon a fee structure that is fair to both parties and sign a contract that clearly spells out when you'll pay, the services you'll receive, and how much you'll be charged. Fees can be a percentage of the assets in your account, a fixed amount at some regular interval, or hourly charges — but you always know what you are paying and why.
You also know that your advisor has met a very strict professional standard. Fee-only financial advisors must become Registered Investment Advisors and meet the highest fiduciary standard, while other advisors are held only to the lower suitability standard. Don’t you want to work with the best of the best?
FEE-BASED IS NOT FEE-ONLY
It’s no surprise that when clients understand their options, fee-only is their first choice. So, to confuse you — and to keep profiting from you — Wall Street firms coined the title “fee-based financial advisor.”
Fee-based financial advice is not the same as fee-only financial advice! Fee-based advisors receive third party commissions, typically on C share mutual funds or through wrap accounts, while a true fee-only advisor is paid only by you. Another half-measure is Dually Registered Firms. Firms registered as both Registered Investment Advisors and Broker/Dealers are trying to have their cake and eat it, too. But because there is no clear division between roles, this leaves clients with crumbs.
You also know that your advisor has met a very strict professional standard. Fee-only financial advisors must become Registered Investment Advisors and meet the highest fiduciary standard, while other advisors are held only to the lower suitability standard. Don’t you want to work with the best of the best?
FEE-BASED IS NOT FEE-ONLY
It’s no surprise that when clients understand their options, fee-only is their first choice. So, to confuse you — and to keep profiting from you — Wall Street firms coined the title “fee-based financial advisor.”
Fee-based financial advice is not the same as fee-only financial advice! Fee-based advisors receive third party commissions, typically on C share mutual funds or through wrap accounts, while a true fee-only advisor is paid only by you. Another half-measure is Dually Registered Firms. Firms registered as both Registered Investment Advisors and Broker/Dealers are trying to have their cake and eat it, too. But because there is no clear division between roles, this leaves clients with crumbs.
Insist on fee-only financial services. Fee-only financial advisors can only make money by helping you succeed. It’s the most motivating — and rewarding — way for experienced financial experts to work.
As you can see, it matters how your financial advisor makes their money! To learn more about the clear benefits of fee-only financial advice, follow the "Schedule an Introduction Call" link below. We'll discuss your planning needs and determine if we're the right fit, then schedule a no-cost introduction meeting in person at either our Myrtle Beach, SC or Mt. Pleasant SC offices. We can also schedule an online meeting for those who have limited time, are non-local, or travelling.
As you can see, it matters how your financial advisor makes their money! To learn more about the clear benefits of fee-only financial advice, follow the "Schedule an Introduction Call" link below. We'll discuss your planning needs and determine if we're the right fit, then schedule a no-cost introduction meeting in person at either our Myrtle Beach, SC or Mt. Pleasant SC offices. We can also schedule an online meeting for those who have limited time, are non-local, or travelling.