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What Do I Need to Know About Commission vs Fee Based Financial Planners?

What Do I Need to Know About Commission vs Fee Based Financial Planners?

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Once you’ve determined that you are ready to hire a wealth manager, your next hurdle will be choosing one. This can be daunting. An initial search might return hundreds of results for financial planners in your area alone. Financial services companies are in magazines, website ads, the local paper, and on billboards, and they all make different promises. At the end of the day, however, this is your money, and you will be paying for their services, so it’s essential that you feel comfortable with the fee structure of advisor or firm you select. 

One of your first steps will be deciding between a commission vs fee based financial planner. Unfortunately, these details probably won’t be front-and-center in a brochure or on a website. You may see many wonderful details on company history, values, testimonials, and professional certifications, but these won’t tell you the whole story. A little of your own research will probably be necessary to help you make the most informed decision for your unique financial situation.

Distinguishing between commission vs fee based financial planners

As an investor, it’s essential to know what it will cost to have wealth managers or financial planners work with your money, turning it into capital as they advise you on how to invest. As it turns out, some of the largest financial services firms on the market are commission based, and this is definitely something to keep in mind. New advisors may receive a base salary during a probationary period while they train and work at growing a new clientele. However, their managers expect them to quickly generate new income for the company as an independent representative with oversight. Eventually, budding financial advisors work for commissions only.

In comparison, fee based financial planner sales structures are usually very straightforward. Some financial planners charge by the hour while others will charge a monthly or quarterly consulting fee. Whether or not you add to your mutual fund or buy new stock shares, you pay the same amount. Under an alternative—but equally as good—fee based model, your financial planner is compensated with a percentage of your total assets under management, generally in the range of .90-1.5%. If you have a good quarter, they earn more for that period since your portfolio of assets is worth more during that time. Sometimes fee rates are tiered based on the size of your portfolio. As your portfolio value grows over time, you can graduate into a lower fee tier.

Remember that transparency about fees is very important. You will be trusting this person or firm with managing your assets, and if anything feels amiss, don’t be afraid to look into it. If you can’t locate the fee structure on your own, don’t hesitate to send a message or ask over the phone. If the representative can’t easily answer this fundamental question, you may want to forgo even an initial consultation and direct your attention elsewhere. 

What is churning and what does the Department of Labor say about it?

Commission based financial planners make sales when they open money market and brokerage accounts. They also earn income when they complete transactional trading activities such as buying and selling mutual funds and stocks. Large firms that support thousands of financial representatives with websites, marketing materials, and offices oftentimes also offer several levels of service and proprietary investment products, which they require employees to promote to their clients. While having extra industry support and training can certainly benefit an investing client, the sales incentive to drive revenue growth through booking trades can become problematic. If a financial planner engages in high levels of trading activities (buys and sells) in a traditional brokerage portfolio, then they are “churning” that account.

A Department of Labor (DOL) Fiduciary Rule was proposed during the Obama administration to stem the problem. Lawmakers determined that churn was causing investors to lose billions in capital on retirement accounts. The law would have required financial planners to register having fiduciary responsibility for their clients under the ERISA Act of 1973. As legal fiduciaries, advisors are required to always act in the best interest of the client regardless of product margins and corporate sales incentives. The law was repealed last summer by the 5th Circuit Court of Appeals; however, it did draw attention to the issue, and it remains on the radar more than it has in previous decades. Churn presents much more of a challenge to commission-only financial services firms than it does to fee based ones, and it is something that smart investors need to be aware of.

Why choose a fee based planner?

Fee based financial planners aren’t motivated by the product sales cycles that you find at other firms. Instead, they work with you to come up with an investment scenario that aligns with your interests and goals and are committed to helping you, without the added pressure of commissions. 

SD Mayer believes in having a thorough, thoughtful approach to financial planning and a measurable investment strategy. Because we are also investment analysts, we can offer professional advice based on market research. Rest assured, when we recommend opening a new brokerage account or mutual fund, you will know why we believe it is a good fit for your portfolio of assets as a whole, and you can feel confident that our advice is not motivated by any source other than helping you reach your full financial potential. 

Get in touch with us today to learn about SDM Advisors’ holistic approach to investing. We are committed to acting in the best interests of our clients for the long-term, and our wealth managers are not working with the pressure of product sales or commissions. If you’re looking for a financial advisor who will be fully focused on you and your unique life goals, contact us.

Image Credit | Constantin Stanciu | Shutterstock 

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