Do you know how your financial advisor is paid? Do you know how much he or she has made from you and your accounts?
Don’t worry if you don’t know. I would say that most individuals are “left in the dark” when it comes to how their advisor is paid and the true cost of their advice.
Here are the three common ways advisors are paid:
1. Commissions
Most financial advisors are paid by commissions from the products and services they sell. This leads to inherent conflicts of interest and often hides the true, total cost of advice. Anyone offering “free advice” probably earns a living from commissions.
Be leery of an advisor that says “you don’t pay me anything, the company does”. The company has to get the money somewhere, so you’ll probably end up paying higher fees, earning lower returns, or a combination of the two.
2. Fee-Based
Advisors that are “fee-based” earn money from financial planning fees and commissions. Although the fee might lead to a more in-depth financial plan, the conflicts of interests from commissions are still present.
3. Fee-Only
The only way to make sure your advisor won’t be influenced by commissions is to work with a “fee-only” advisor. Fee-only advisors are paid directly by their clients and do not accept any third-party commissions. The cost of their advice is completely transparent.
The mission of a fee-only advisor is to give you advice, and direct you to the low-cost, high-quality, commission-free products and services that are best for you. Also, since fee-only advisors don’t have to sell you anything to make money, they’re able to give you advice on any area of your finances, including rental real estate, business assets, and more.
My goal in writing this is to make sure you’re an informed investor. Although there are excellent advisors that accept commissions, you should be informed of the pitfalls of this compensation model and the alternatives available.
Ask your advisor how he or she is compensated and ask for the true, total cost of any recommendations - including any commissions he or she will earn - in writing. Ask for full disclosure and expect nothing less!
When it comes to the true cost of advice, what you don’t know can hurt you!
To learn more about our company - and find out how we are different from other financial advisors - call (254) 227-6433 or visit www.VannoyAdvisoryGroup.com.
