In the third and final part of our Shrewd Decisions series, we explore how to fairly pay your advisor. In this day and age especially, we all want to be shrewd and intelligent in terms of how we invest our money. The value of expert financial advice, custom tailored to help secure the financial security of you and your family can be significant. At the same time, you’re not looking to single handedly buy someone else’s beach house. How do you fairly compensate your advisor for the value they provide?
What are you getting?
That’s the million dollar question. See our articles, What is Financial Planning and Choose the Right Advisor For You, for an in depth look at these important issues. At a high level, it’s important to realize there is a tremendous variation in what people who call themselves “financial planners” actually do, which is why choosing wisely is an important step.
You’re paying for their expert advice, which must be based on your values and goals, unbiased and delivered timely. It’s not about piece-meal implementation like whether you should buy Apple or open a 529 for your child or buy a life insurance policy. It’s about making comprehensive, big picture decisions that will give you the highest likelihood of accomplishing your goals and realizing your future aspirations, balanced with managing risks so you can sleep soundly at night.
Myth: Investment management is comprehensive financial advice.
Truth: Investments are often the first thing we think about because they’re sexy—they’re flashy. However, investments are only one piece of a comprehensive financial plan.
Myth: All advisors are held to the same standard.
Truth: Certified Financial Planners (CFPs) are held to the highest standard. We are judged by the “Prudent Expert Rule” while traditional brokers and insurance agents, many of whom call themselves advisors, are held to a much lower “Suitability Standard.”
Myth: All financial advisors are created equal.
Truth: Many advisors are great salespeople and tell a fantastic story. However, what makes someone a worthy to be your trusted advisor is experience, credentials and shared values.
Myth: All financial plans are focused on your best interests.
Truth: Many “financial plans” are actually sales tools, carefully designed to sell you something.
How much are you paying?
This can be more difficult to determine than it sounds. When you negotiate a price for a new car—that should be it… But it’s not. The dealer slips in things like a dealer fee, documentation fee, delivery fee, title fee, registration fee, dealer prep fee, or others, all on top of the price you thought you agreed to. If that seems like dirty business, many “financial advisors” are more sophisticated about how they disguise their fees. Be especially cautious with advisors who claim to be salaried and do not get paid based on what their clients do.
Examples of disguised compensation:
High expense ratios (can exceed 2%)
Mutual fund 12b-1 fees
Revenue sharing between mutual funds and advisors (never disclosed)
401(k) or 403(b) plans usually pay a portion of fund expenses to the provider
Proprietary investments often pay the advisor bonuses (closely guarded secret)
Bonuses for meeting sales quotas
Insurance and Annuities have the highest fees, which you often don’t see
Mutual fund load fees (front and/or back end up to 5.75%)
To eliminate all uncertainty, it’s best to go with a fee-based advisor. You’ll know exactly what you’re paying and it may qualify as an itemized tax deduction. Nothing hidden, no surprises.
How much should you pay?
Ultimately, it depends on what you’re getting. Many firms separate planning fees from investment fees, so again it can be a little murky. You’ll have to first understand all the fees you are paying, then consider what services your advisor provides to you and how much benefit you get from them. Advisors are not all created equal. Vetting their qualifications and how much they care about your family’s success should be a primary consideration in determining value.
Our clients are all highly intelligent. They could organize, plan, execute and maintain their financial matters on their own. One reason they choose to partner with FWI Wealth Management is because it frees them to focus on their passions and their family.
We believe the fee you pay should be a win-win for all parties, driven by the value delivered. It should be a single fee that is easily calculated and clearly indicated on your statements.
At FWI Wealth Management, we charge a single, transparent fee and provide our clients unbiased advice across all parts of their financial life. We focus on the lifetime of the relationship. We’re not asking our clients to buy something, we’re asking them to buy into something. The value we deliver to our clients far exceeds investment advice and is one of the main reasons they choose to stay with us. We've developed and refined a process that puts all the pieces together for you as your life unfolds and your needs evolve—so together, we never lose site with what Matters and what we can Control.