The Business of Financial Advice

The Wiser Wealth Management Roundtable podcast has officially launched!  We are excited to have the team of Casey T. Smith, Brad Lyons, CFP^® and Matthews Barnett, CFP^®, ChFC^®, CLU^®, explore topics related to personal finance, investing and relevant financial business news and topics. The Wiser Wealth Management Roundtable podcast believes the best financial advice should be conflict-free.

Today’s topic is the business of financial advice. Financial advisor compensation is complex and sometimes difficult to understand. Three types of financial advice are explored: Fee-only, Fee-based and investment sales. Do you know how your financial advisor is paid? Learn how to differentiate between the various business models and what questions to ask your advisor.

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SUMMARY

“We believe the best financial advice should always be conflict free.”

Today’s podcast dives into the topic of the different types of financial advisors and how various firms are structured, specifically relating to compensation. There are three identifiable firm structures: fee-only, fee-based and commission-based. Here at Wiser Wealth, we are proud to be a fee-only financial firm. This means there are no conflicts of interest when working with clients. It is our sole objective to work in the client’s best interest and finding the best solution for each specific need. Our advisors sit on the same side of the table when discussing potential products and methods.

Fee-only should not be confused with fee-based. While fee-only is entirely transparent and exclusively charges the client via invoice, fee-based includes commissions and is also sometimes referred to as a hybrid model. A great example to explain this would be if a client is in need of long-term care insurance. The fee-only firm will sit down with the client, along with two companies selling long-term care insurance. After identifying what each company has to offer, the fee-only advisor will advise the client as to which company is best suited for them. However, a fee-based advisor will likely have incentive, whether that be a higher flat fee or a commission for recommending one company over the other, meaning there is some underlying motive behind the “advice.”

Advisors operating in a fee-based business model will argue that they add an ‘efficiency’ factor for the client, by offering additional products and services from an outside company within their firm. So rather than sending the client elsewhere to purchase a needed service, they are able to provide the solution on the spot. However, the idea of “you cannot serve two masters,” does not reign true in the fee-based model. In reality, fee-based advisors are serving both the client and themselves when they gain the client’s business and also earn a commission through pushing another company’s product or services.

After looking at the differences between fee-only and fee-based, the last model, and arguably the most prominent model today, is commission-based. Insurance sales are a prominent feature in the commission-based model, encouraging clients to purchase insurance that ultimately results in the advisor’s compensation. The most notable difference between compensation-based and fee-only is the method of compensation. Simply put, both the product and the client are paying the advisor under a commission model, whereas the client is compensating the fee-only advisor only. There is never an outside company influencing a fee-only firm to push their product or service onto the client, which brings us to the idea of fiduciary + fee-only = your best interest.

So what should you look for when identifying the right firm for you? When interviewing different firms, ask this one question: “Do you operate under a fiduciary standard?” This will allow you to get a better understanding of the firm and who they are really working for.