Ep. 108 – Fees, Commissions, and Being a Fiduciary

Have you asked questions about payment to that financial advisor you’re considering hiring? When it comes to hiring a new financial advisor, it is important to ask and understand how they’re getting paid.

Whether they’re getting paid through commission or fees, they should disclose that information with ease. It’s always good to know the type of fees you’re getting into.

In this episode of the Secure Your Retirement podcast, we talk about how advisors can get paid through fees and commissions. Listen in to learn about fiduciary and why it is important to ensure the financial advisor you hire is also a fiduciary.

In this episode, find out:

·      Why you should ask your financial advisor how they’re getting paid to understand fees.

·      How advisors used to be paid commissions on stocks and mutual funds brokering.

·      How advisors charge on an hourly basis/flat rate or a percentage of assets they’re managing.

·      Fiduciary – someone making decisions for you before they make decisions in their favor.

·      The importance of working with a fiduciary and asking that question before hiring an advisor.

·      The difference between legal and assumed fiduciary.

·      Ways that can hold an advisor to a fiduciary standard and suitability.

·      Ensure you properly understand an investment when not working with an independent advisor.

Tweetable Quotes:

·      “The big thing here is someone that is working in your best interest, making decisions for you regardless of how it’s going to affect them.”– Murs Tariq

·      “Fiduciaries a lot of time will keep things very clean so they don’t have to disclose things like paid recommendations.”– Radon Stancil

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the Transcript:

Have you ever wondered how do you know what your advisor’s charging you in fees and what does it mean to be a fiduciary? Well, by the end of this video, you’re going to gain clarity for your personal retirement plan and have action items to secure your retirement.

To learn more about securing your retirement and all the different elements you need to know, subscribe to our channel and hit the bell to be notified when we post a video every Monday. We have helped hundreds of our clients gain clarity and get on the path to a comfortable and happy retirement. Now it’s your turn. Let’s dive in.

Welcome everyone to episode 108. That’s amazing that we’ve got 108 episodes and today we’re talking about on our topics of retirement and action and we’re continuing this a little series that Murs and I came up with about choosing the right kind of financial advisor. A lot of times people ask that question, “Well, how do I know what’s the right financial advisor? How do I know what I should and shouldn’t ask and what do I look for?” So we’ve been doing a series on these and today we’re going to continue this topic and we’re going to talk about two specific things. One, we’re going to talk about being a fiduciary, what that means, why it’s important, why you might want to consider having a fiduciary, and then the second thing we’re going to talk about our fees and commissions, how advisors get paid, and we’re going to kind of walk you through those different scenarios.

I think let’s jump into, first of all, fees and commissions. You want to get us started on that Murs?

Yeah, sure. Fees are always something that you should be considering. It’s always top of mind when we’re talking about investments and financial advisors. The whole industry has gotten very fee-conscious on the investment side. If you’re investing in funds or ETFs, there’s been competition between all of the major brokerage companies like Schwab, TD Ameritrade, Fidelity, all the big names that you know. They have constantly been in competition as far as reducing the fees when it comes to the funds or when it comes to transaction costs. Transaction costs have basically gone away over the past couple of years and so that conversation is always going to be top of mind. But when it comes to working with a financial advisor, it’s always good to know what you’re getting into in a lot of different ways.

One is fees, but also what type of advisor are you going to start working with? What’s their strategy? What’s their overall philosophy, dose it line up with yours? But today we’re talking about fees. We sit down with people all the time, clients or not clients and when it comes to someone that’s searching for a new advisor and maybe they already have one that they seem to be happy with or maybe they’ve just decided that they need to go in a different direction, and we ask them, “Why have you decided that now is the time to make a shift in your overall plan and your overall guidance that you’re getting?”

Well, sometimes they’ll say, “Well, this advisor just doesn’t line up with where I am in my life right now,” and so we dive deeper into that and we ask them, “Well, do you know how your advisor is currently getting paid?” A lot of times the answer is, “No, we just assume that they’re getting paid somehow or the other,” and they don’t even know if they’re paying the advisor or if the advisor’s receiving commissions or if the mutual fund company is paying the advisor. That’s always a good question to be asking when you’re sitting down and interviewing and doing this whole process, feel free to ask that question. It’s not an uncomfortable question as long as the advisor is con aware of what they’re getting into. We are very happy to have that conversation with clients all the time and our fee structure’s very transparent so you’ll see it. If you’re working with us, you’ll see it. There’s nothing there to hide. If an advisor starts to dodge around on that conversation, well, then you should definitely dive deeper and also be a little bit wary about that whole conversation.

But today we’re going to talk about what are the different types of ways that an advisor can get paid? There are different structures and this is not to say that any structure is better than the other, it’s just different ways that an advisor can get paid. Radon, you want to kind of take us through that?

Yeah. I’ll start with the oldest way that advisors have gotten paid in the past and they still do, but this is the one that has been around for a long, long time and that’s commissions. Commissions really kind of come down if you sell a product, but also within the investment world. The way it used to be, exclusively, if you wanted to buy a stock or sell a stock, you had to contact a broker and then that broker would go out and they would make that trade for you. Then they would get a little bit of a commission for actually doing that.

That is almost gone today. It’s not 100% gone, but it’s almost gone. It went way down and where you would pay like a Schwab or a TD Ameritrade or something like that and they would go down from, used to be 15, then it went down to 10, then to 5, now it’s nothing to go make that trade.

Now, the other way is on mutual funds. Mutual funds, by the way, still today have commissions on them for a lot of brokers. Really the idea behind that is, is that you say, “Hey, I want you to go out and find this good mutual fund for me,” and they can have fees or commissions in two different locations typically. One is a front end load and the other is a back end. What that means is, is that I either have to pay a commission going in, or I have to pay a commission coming out.

Now there’s another way and that is time of hold. The broker could get a commission and you don’t have to pay that commission out of your funds, as long as the mutual fund is held for a period of time. But again, you just got to understand what that is. I think you should ask the question, if you are working with an advisor and they’re putting mutual funds in your portfolio, ask them, “Are you getting a commission?” Make sure you ask them, “In any way, front-end, back-end, over time, are you getting commission?”

Now, the reason why I think that’s an important question is you want to know, are you making this recommendation because it’s best for me or are you making this recommendation for the commission? I think that helps. Now, if they’re making a commission, I’m not saying that’s bad, just understand it and let them be able to explain it. All right? That’s the oldest commission.

Then we moved into this world of fees. Now, there’s a couple of different ways that advisors can charge fees. One of those is an hourly rate or a flat rate, and sometimes advisors will charge you a fee and say, “Hey, to do planning work, I’m going to charge you by the hour,” or, “I’m going to charge you $1,500,” and that’s real clear. “I’m going to do this planning work and I’m going to charge you this fee.” The other way is as a percentage of your assets under management. Now they can do both. They could say, “We’re going to charge a flat rate to do the planning work and in addition to that, we’re going to charge a fee for the money under management.” That could be, let’s just use 1%. “1% of whatever it is that you are managing, that’s what we’re going to charge.” Again, that was pretty easy and clear.

Typically, if they’re charging you a fee, they would not be getting a commission on those trades. I’ll just explain, just so you know, we talk about how we do it. We get a percentage of the money that we’re managing, a percentage of the assets under management. We don’t have a flat fee and we don’t get any commissions on trades or anything like that. The only way we get paid is by the client, the percentage of the money that we’re managing. That’s the big picture. The thing comes about here is to talk about is how does that work and make sure you understand how the advisor works.

Now, I do want to just speak on the amount of fee. Sometimes people go, “Well, what’s your fee,” and they want to make their decision based on the amount of fee. I would think you would be better to make your decision based on what they do for the fee. If you go to an advisor and they say, “Oh, I only charged 0.75,” and another advisor charges 1.25, you might go, “Well, I’m going to go with the 0.75 guy.” But what if the 0.75 guy only just manages money, that’s all he does, he doesn’t deal with anything else but the 1.25 guy is billed into that is all of your planning, all of the meetings you need throughout the year, helping you with social security, Medicare, helping you with taxes, maybe even doing your taxes for you as a return. Now all of a sudden you’re going, “Wait a minute, maybe the 1.25 guys giving me a much better deal than even the 0.75 guy.” Not to mention how they manage the money. Keep that in mind, as you’re thinking that through.

Now, I know we just touched the surface and we’re going to talk about fees a little bit more as we move into the next topic here, but fiduciary. We’re going to, first of all, say what is a fiduciary and what’s the difference between a person who is a fiduciary and not a fiduciary? Can you take that over Murs?

Yeah, I’ll get us started and these are a very hot topic and just like fees, fiduciary is also a very hot topic and kind of some of this conversation coincides. The idea of someone working in your best interest, making decisions that are going to be the best for you, regardless of how they are compensated, That’s essentially what a fiduciary is. They have to make decisions for you before they can make decisions in their own favor. That’s how fiduciary works, that’s how we are set up, Radon and I, over here at Peace of Mind Wealth Management. We are both certified financial planners and to get those letters behind our name, there is a considerable amount of education, considerable amount of continuing education, a very difficult test that we had to sit through, and then also a commitment to upholding that fiduciary standard by law.

To get into what a fiduciary is, basically the dictionary definition is that it’s held or founded in trust or confidence. That’s basically the standard that we’re holding ourselves to is that if we’re going to make a recommendation to a client, first of all, we have to know everything about that client’s overall situation when it comes to financials, but also their goals and everything that they’re trying to accomplish with this whole conversation, we have to know all of that. Then we take that information and make a recommendation that we feel is in their best interest. Not good enough, it needs to be in their best interest and we’ll get into that whole good enough conversation.

But from there then if it came down to it, we’d have to be able to prove as well, why is this the best recommendation for the client in their best interest? It’s a really, I think, a very important thing to be working with the fiduciary. Also when you’re having that conversation with the new advisor that you may be interviewing and you ask them about the fees, also ask them, “Hey, are you a fiduciary?” If they say they are not, well, you may want to dive deeper into how they make their decisions and why they are not a fiduciary.

But Radon, so I’ve talked a little bit about fiduciary. The big, big thing here is someone is working in your best interest, making decisions for you, regardless of how it’s going to affect them, especially from a compensation perspective. What’s the other side of that coin, Radon?

Yeah, I think too is understanding the difference between legal fiduciary and assumed fiduciary. What I mean by that is there are some advisors who are not bound, they work off of what’s called suitability and suitability has been around for a very long time. Suitability basically says, “I, as an advisor, have to gather enough information and then make a suitable recommendation. It does not have to be the cheapest, doesn’t have to be in your best interest, just has to be able to fit. I could have two offerings, both of them being suitable, but one really being the best, one being much lower fees, maybe being a better return, all that but as long as I can prove that it’s suitable, I can work under that world if I work on our suitability and I’m not a fiduciary.”

Now I could also be a person who is not bound by fiduciary standards and I can say something like, “I always act as a fiduciary would,” that doesn’t mean I’m bound to it. It’s just me telling you, “Hey, I’m not a fiduciary, but I always treat my clients as a fiduciary would.” Now that’s a nice statement, but you want, in my opinion, you’d should and I think look for a person who is bound, held to, the fiduciary standard.

What binds a person to fiduciary standard? Well, one is voluntary and that is being a certified financial planner. Being a financial planner, certified financial planner, I don’t have to be a CFP in order to operate in this world. I can be an advisor without being a CFP, but if I become a CFP, I basically go under that umbrella to hold that certification and I voluntarily say, “Through that certification, I will be a fiduciary if I want to hold the CFP.” I can’t hold the CFP and not be a fiduciary. The other way is our licensing. If I get licensed through the Securities and Exchange Commission and FINRA under what is called Series 65, that is an investment advisor and I am been bound by law and that license that I have to hold the fiduciary standard. Again, ask your advisor, “What are your licenses?” If they don’t have that series 65, then they’re likely working under what’s called suitability, not a fiduciary. Keep that in mind.

Now, also as a fiduciary, you have to disclose things that might be a conflict of interest. Let’s just use an example. Let’s say that I were to ever talk to a client about something. Let’s say I had a partnership with an attorney and I made money from that attorney or that attorney sent me on a trip and I referred people to the attorney and that attorney somehow compensated me. Well, then that could be a conflict of interest. I would have to disclose that to my client and say, “Hey, I’m going to refer you to this attorney and by the way, we have a business relationship,” meaning I received compensation. Now you get to make the decision. Do I believe this recommendation or is he doing it just because he gets compensation? A fiduciary has to do that. Fiduciaries a lot of times will keep things very clean, so they don’t have to disclose things like that. Meaning they would not receive compensation from an attorney so that they don’t have to go through all that and disclose it. Doesn’t mean it’s not possible to do it in a correct way, it’s just another layer.

Now we’ve spoke on this here for a few minutes. Anything else, Murs, that you think we ought to cover on either topic fees, commissions, fiduciary?

No, I think that’s pretty much it. The only thing I would add is when you’re, and it comes kind of back to when you’re deciding who you want to work with, our company, we are independent advisors and the independent advisor space is growing tremendously, and the reason is, is one of the major reasons, is this whole fiduciary suitability standard conversation.

Let’s go and just talk about any insurance company and you’re meeting with an agent of that insurance company. I’m just going to throw a name out there, let’s say it’s Nationwide. That agent of that insurance company is really only going to be able to offer you what? Nationwide products, right? That’s where that whole suitability conversation comes into place. Brokers and insurance agents that work for a specific organization that are not independent are just tied to whatever they have to offer, which is whatever the company is producing. They are, in a way, not forced, but they are incentivized, or they only have the option to push the product that the company is creating. You got to still ask those questions and really understand the product or the stock or whatever it is to know what you’re getting into to make sure it feels right for you if you’re working directly with an agent that is associated with a specific company.

If you’re working with an independent advisor, I’ll tell you how we operate. If we’re working in the insurance world, we are licensed to sell really any insurance product with any insurance company. What do we do? First we do, and this goes back to the fiduciary standard, we say, “Okay, well, what is the situation that the client has? What are their financials? What is the overall goal? What is the overall objective?” Then we go and say, “Okay, well, now that we know this, let’s go shopping. Let’s go shopping and let’s find the best product and we don’t care which company it is. We need a product that is going to line up with what we’re trying to accomplish.” It could be a Nationwide, it also could be an Allianz, or it could be in Athene or it could be anything that’s out there because we have access to all those different companies whereas that Nationwide rep is limited to just that one, so just something to keep in mind when we’re having this fiduciary suitability conversation, but that’s all I’ve got to add.

Great. If you have listened to all this, and you’re thinking, “My goodness, that’s a lot,” we have a blog article written on this very topic on our website, pomwealth.netblog. Or you can just go to the website, click on the link for blog and you’ll see all the different blog articles we have there. Thank you so very much for listening to us today. We hope you have a great week. We look forward to talking to you soon.

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