Whether you are shopping for a new advisor, or you have had the same advisor for years, it is important to understand how your advisor and their firm generate revenue. While cost only seems to matter if you fail to see value in the services you are receiving, there are several reasons why it is good to understand the fee structure of your investments. Read more to learn about fee-based vs. fee only financial advisors.
Traditionally, the finance industry was made up of broker-dealers that hired a sales force to sell products. Registered representatives of these broker-dealers earn commission on products that they sold to clients. Products range from loaded mutual funds, brokerage accounts and insurance products such as annuities and life insurance. When transactions or trades are made, the advisor receives a commission. If no transactions are made, the advisor does not receive compensation. Advisors who work for broker-dealers are often referred to as brokers or registered representatives.
In recent years, the industry has shifted, and more advisors are working with their clients under fee-only advisory platforms, managing assets for a fee and providing financial planning for a fee. Fees in most cases are assessed based upon how much money is being managed or how many hours are spent on planning, not on how many trades are made. This type of business is offered by a Registered Investment Advisor. Registered Investment Advisor or RIA firms focus on implementing advice driven solutions and work under a fiduciary standard. Investment Advisor Representatives are required to put their client’s best interests before the interests of the company, firm, and themselves.
Some firms will choose to register as both a Broker-Dealer and an RIA firm. These dually registered firms blur the line between the two business models which can really be confusing to investors. Advisors who work under this model often refer to themselves as Fee-Based Advisors. They may choose to manage money or prepare financial planning for a fee and sell products. They can switch their role with a client at will and it can be difficult to determine when products are being sold and when fiduciary advice is being given. This can create a conflict of interest for an advisor who must choose between selling a product that creates commission or acting as a fiduciary. Some of the most expensive investments generate high commissions for advisors, which can mean higher costs for clients. Portfolios that have higher costs will need to be invested more aggressively to overcome the expense. If costs are excessive, portfolios may not be able to overcome the expense and may have disappointing returns.
How can you avoid choosing advisors with possible conflicts of interest? Choose Fee-Only. Fee-Only Registered Investment Advisors are required to always work under a Fiduciary Standard. They do not sell products, are not registered as sales agents for any investment company. They do not use investments to generate commissions and are never compensated by anyone other than their client. They are not swayed to choose one investment over another based upon how they will be paid.
It can be hard to determine whether an advisor is a Fee-Only Fiduciary or Fee-Based Dually Registered Advisor, but you can determine the difference by asking the right questions. Check out this Fiduciary Questionnaire that can help you differentiate between Fee-Only Fiduciaries and Fee-Based Advisors.
Investment Advisor Representative
Rebecca joined the firm in 2011 as an Investment Advisor Representative. In this role, she works with clients to manage their investment assets and help them obtain their financial objectives. Rebecca brings a great deal of experience to the team having worked for several years at Marshall & IIsley Bank and MetLife. She earned a Masters of Business Administration degree (with an emphasis on finance) from Concordia University.