’m glad you chose to learn more about the topic of advisor compensation. From my branch office, located in San Diego, CA (township of Carlsbad), I wonder why the topic of advisor compensation doesn’t receive more attention. The last time I focused on the topic of compensation was years ago, while working within the investment research department of a large Wall Street bank. While working for the bank in a research role, I was tasked with developing a commission payout schedule for the many insurance related products the bank made available to its clients (investors like you). While working for the bank, I noticed an unsettling correlation between the products recommended and the percentage paid in compensation. All else being equal, the most sales came from those products that paid the highest commissions. Investment products should compete for investor dollars based on product features (lower fees, performance etc.) – not who pays the advisor the highest commission. Advisors should be conducting due diligence to determine which product best meets the needs of the investor. Today, advisors go by many different names, and the way we are compensated for our services is often a reflection of our “advisor type.” The type of advisor you select, be it a retirement planner, tax specialist, or wealth manager, will often dictate the form of compensation charged – and this “advisor type” will influence the product selection process too – much like the commission percentage did during my time at the bank.
Advisor compensation is a very important topic, and the way you pay your advisor for services will likely impact your personal financial goals. When I meet with a prospect/client, the compensation question always comes up. Prospective clients will ask, “how much do you charge” or “how are you paid?” Advisors today for the most part are either paid in commissions or advisory fees.
*See the below chart to identify the different types of advisors, and when one advisor type may be more appropriate than another.
When the topic of compensation arises, you need to be prepared by reviewing the below chart and familiarizing yourself with the different advisor types - specifically how each advisor type charges for their services. Factors that should be considered in determining which type of advisor to hire include but are not limited to trading frequency, portfolio size, and the complexity and nature of financial planning needed. Advisors may call themselves portfolio managers, retirement planners, tax specialists, or risk managers - but remember, advisors are salesman too. Don’t count on a commission only Certified Financial Advisor™ to suggest you leave his/her office to find a fee-only Certified Financial Advisor™ – this will likely never happen. Often, prospective clients don’t understand all the implications of choosing an advisor type, and this leads to unfavorable retirement outcomes. The type of compensation an advisor receives will dictate the specific types of investments (mutual funds, annuities, insurance products etc.) your advisor will recommend.
* GFH Financial offers a dual / hybrid compensation structure – The flexibility of both compensation options provides for greater product breadth, lower fees, leading to more favorable investment outcomes.