Fees, Commissions, and Being a Fiduciary
When shifting from one financial advisor to another, there are many questions that you should be asking. However, there are two main questions, which we’ll be covering today in great detail:
- What are your fees and commissions?
- Are you a fiduciary?
Fees and commissions are going to be tied into the advisor’s offering in some way, so you must know how your advisor is being paid. Choosing the right financial advisor is a process, and you need to really have a firm understanding of fees, commissions and being a fiduciary to safeguard your retirement.
What are Your Fees and Commissions?
Fees have been a central focus point of big brokerage companies like Charles Schwab and TD Ameritrade. The entire industry has been in a “fee” war where they’ve tried to compete in the fee department with each other, and fees fell.
For you, lower fees are always a good thing.
Transaction costs have also practically disappeared due to the increased focus on lowering fees and costs for investors.
When working with a financial advisor, you want to know many things, but today, we’re focusing on fees. You need to understand how your advisor is being paid. Many people come into our office and explain that they don’t know all of the fees and commissions that their advisor uses.
It’s essential to:
- Ask your advisor about their fee structure and commission
- Dive deeper into the advisor’s fees and commission if your questions make them uncomfortable or they seem to want to dodge your questions
Since you’re hiring an advisor to work on your retirement plan, it’s your right to know how they’re being paid. We would advise against working with an advisor who doesn’t want to divulge their fee structure and commission.
There are a few ways that your advisor can be paid:
Commissions are a form of payment that has been around for probably the longest. Commissions are made when products are sold and also in the investment world. Originally, brokers needed to be contacted to make trades and would earn commission on these trades.
You can buy stocks without commissions in today’s investment world.
Mutual funds often have fees and commissions on the front-end or back-end, meaning your broker makes a commission at the start or end of the investment.
You have every right to ask your advisor whether they’re receiving a commission on your investments in any way.
Advisors can charge fees in a variety of ways:
- Hourly: An hourly fee may be applied when the advisor works on your portfolio or completes certain tasks.
- Flat-fee: A flat fee may be assessed for things such as helping transfer your accounts or setting up your investment portfolio.
- Percentage of assets under management: Finally, a percentage fee may be assessed based on your portfolio’s value. For example, a 1% fee may be charged on your $100,000 investment account, or $1,000.
Advisors may also charge a combination of the fees above.
For the most part, advisors that charge fees will not make a commission. However, if insurance products are included, a commission may be assessed.
As someone looking from the outside, it’s common to think that the lowest fees are the best. But that’s not always the case. You need to look at the services that are wrapped into the fees to really understand the value in a service.
You might pay a 1% commission for a very hands-off advisor or 1.25% for an advisor who also assists with tax planning and other aspects of financial planning. It’s vital that you ask your advisor what their fees are and what’s included in their fees to know exactly which services you’re receiving.
Are You a Fiduciary?
A fiduciary is very important to understand when working with any financial advisor. You should be asking if the advisor is a fiduciary, but before you do that, it’s important to know what being a fiduciary really means.
What is a Fiduciary?
A fiduciary has to make decisions that are in your best interest. Therefore, certified financial planners must uphold a fiduciary standard. For example, let’s assume that the advisor makes a 10% commission on a specific type of insurance and a 5% commission on the other.
Someone who does not abide by a fiduciary standard would enrich themselves by recommending the product that gives them the most commission, even if that’s not the best product for you.
However, when an advisor is a fiduciary, they need to consider your best interests, even if that means lower commissions for them.
We run as a fiduciary, and our business is founded on:
- Learning about a client
- Understanding the client’s goals
- Recommending the best options for the client to reach their goals
Not only does a fiduciary have to work in your best interest, but they need to be able to prove this in the future. If a client questions why we recommended a specific financial product, we must explain why and show proof that this product was the best based on our knowledge and their goals.
Legal vs. Assumed Fiduciary
Some advisors work on legal and assumed fiduciary duties. Suitability is one way that the advisor may work, and this means that they need to offer a suitable recommendation. In the world of suitability, the advisor can recommend a higher commission product if it suits your needs.
Assumed fiduciary is also an option, and this means that the advisor will do their best to work in your interests, but they’re not legally bound to do so.
Finally, there are legally bound fiduciaries, which we believe offers the best option. There are two times when a financial advisor must be a fiduciary:
- Certified financial planners are obligated to be a legal fiduciary to hold their CFP designation.
- Licensing is another time when an advisor may be a legal fiduciary. For example, if an advisor is Series 65 licensed, under FINRA, they’re bound by law to hold a fiduciary standard.
You should be asking your financial advisor about their fiduciary standards and whether they uphold them. You should also ask about licensing so that you have peace of mind that if they’re Series 65 licensed, they’ll work in your best interest.
Fiduciaries Must Disclose Things That May Be a Conflict of Interest
For example, let’s assume that I have a partnership with an attorney where I make money or some form of compensation from the attorney. A fiduciary must disclose this information and allow you to decide on your own.
We’re seeing many clients who are moving to independent financial advisors because of the fiduciary standards they uphold. So, let’s assume that you work with someone at Nationwide. The agent will recommend products that the company offers.
Independent financial advisors aren’t required to recommend specific products.
The Nationwide representative would recommend their own products, even if it’s not necessarily the best option available. Independent financial advisors, like ourselves, can recommend a wealth of products, whether that means the product is from Nationwide or someone else.
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