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What you should know about financial advisor compensation

What you should know about financial advisor compensation

| June 27, 2016

"The price of inaction is far greater than the cost of making a mistake." - Meister Eckhart

Ask your advisor about compensation. I don’t know why this is such a difficult subject for clients to discuss. This whole work-for-pay exchange seems to cause a lot of confusion! As a client, especially if you’re working with family, bring it up! It’s in your best interest. In light of recent legislation - the DOL's Fiduciary Rule is going to have some impact on advisors and their compensation. Old school investment managing advisors may find themselves dropping their fees significantly, or they may have to join the ranks such as our team here at Engage Advisors, LLC, offering financial planning advice at the same rate of those who are only investment managers, but actually offering...Advice! 

Here's what you should know about compensation. It varies widely. In my experience, those who are extremely cheap either have no value in their advice, can't drive enough business with a legitimate fee, or are just to inexperienced for people to pay them industry norms. Those who are extremely expensive are either fantastic salespeople, hiding their compensation, following their institutions requirements or have to charge a big fee just to live on. Either way, it's best to be in the middle of the spectrum. Modest fees with a solid value proposition compensating the client with financial impact for the dollars spent.

First ask, are they paid commission, fee or hourly. Insurance, annuties, A, B, C share mutual funds are almost always commission based. Until the Fiduciary Rule is in full effect, commission based advisors have no fiduciary status and only need the client to say it's in their interest. Fee compensation on the other hand ties an advisor to a fiduciary contract that they have to act in the clients best interest no matter what. An hourly advisor often has neither contract because you're paying them for the how to instructions and then you get to be accountable for making it happen.

Next ask how much they are being paid. Investments can often have inherent conflicts of interest that an inexperienced, non-confident, or unethical professional is going to get very uncomfortable trying to explain to you! You are paying either a commission, an asset-based fee, or an hourly fee for the financial advice that you receive. How much you are paying should be readily available without the professional getting uncomfortable.

Some professionals may have more difficulty discussing this with you depending on what products they are using, but they should still know exactly what they are making and what expenses are involved with your money. If they can’t, it sounds like time to find someone who will be transparent with you.