“I think I pay my advisor a fee. But I also think there’s a commission, too. Actually, I’m really not sure.”
At Total Wealth Planning, we hear some version of this statement on a fairly regular basis. Whether we’re talking to prospects or simply new contacts, there always seems to be confusion about how their financial advisor is compensated.
Financial services and health care may be the only industries in which it is unclear exactly how much the customer pays for the final product. With many financial services firms, compensation is usually wrapped in a maze of fees, surcharges, and commissions. It makes it difficult to determine how much you’ve truly paid for advice or for a specific product.
We value transparency here at Total Wealth Planning, which is why we act as a fee-only financial advisory firm. As a fee-only advisor, we are compensated only through a direct fee from our clients. There are no commissions or other forms of compensation involved. That means you always know exactly how much you’re paying for our services.
That isn’t the case with every financial services firm. In fact, there are many different ways in which a financial advisor can charge your for their services. Many of the terms and descriptions of these compensation structures aren’t always clear, making it even more difficult to know how you are being charged.
Generally, most financial services firms fall into one of three groups: commission-based, fee-based, and fee-only. If you understand what those terms me and how they impact you and your finances, then you’ll be able to make a more informed decision about who you choose to work with.
Commission-Based
Commission-based advisors make a substantial portion of their income from commissions related to the sales of specific products. There was a time when nearly all financial advisors worked in this manner. That time has long past.
There are clear challenges and conflicts of interest with a commission-based advisor. They are paid by the providers of specific mutual funds, insurance policies, annuities, and more. You pay fees on those specific products. The product carrier pays a commission to the advisor for making the sale.
Clearly, this arrangement can skew an advisor’s thinking and prevent them from being objective. Are they suggesting a certain mutual fund or other product because it’s the best option for your needs and goals? Or are they suggesting it because it pays the highest commission?
Another issue with commission-based advisors is that their income is inconsistent. They get paid when they make sales. As you might imagine, that can create some urgency. Again, they may be recommending that you choose a solution because it’s right for you. But they could also be recommending it because they need to generate income.
Many firms have moved away from commission-based structures, and for good reason. However, there are still some firms and advisors who work in this manner.
Fee-Based
This is a popular and fairly common compensation structure that can be very misleading and confusing. Many advisors claim that they are “fee-based.” That makes many clients to believe that the advisor is compensated by fees only and not by commissions.
However, that’s not necessarily the case. Fee-based simply means that fees make up a significant portion of the compensation. However, the advisor could still earn commissions for selling products.
For example, an advisor may charge a flat percentage fee for advice and management of investment assets. However, they could also earn a commission for selling products that fall outside of the fee agreement, like life insurance, annuities, or certain investment products.
In the most egregious scenarios, an advisor could sell you a product that pays him or her a commission. Then he or she could charge a “fee” for ongoing management of the product. That’s double compensation for the same service.
The ambiguity in this type of structure is problematic. While the fee for the investment management may be fair and transparent, it also may be difficult to know which recommendations are part of the fee-based program and which generate a commission.
Again, the same questions arise. Is the advisor recommending a strategy because it’s right your needs and goals? Or because it provides additional compensation on top of the fees you already pay.
Fee-Only
Finally, there are fee-only compensation structures, which is what is used here at Total Wealth Planning. In a fee-only structure, you pay an agreed-upon fee based on your specific needs and services. That fee is paid in regular increments, usually on a quarterly basis.
There are no commissions, bonuses, penalties, or other forms of payment. The fee you pay includes all advice, planning, and management. There are no products offered outside of the fee-only arrangement and no possibility for commissions or other forms of compensation.
We prefer this kind of structure because it’s transparent. You know how much you’re paying and what you’re paying for. There’s no mystery about charges, fees, or services. It’s all plainly visible on your statement.
Do you know how you pay your advisor? Are you ready for a more transparent relationship? Let’s talk about it. Contact us today at Total Wealth Planning. We welcome the opportunity to connect and learn about your needs and goals.
