What’s the #1 Question You Should Ask a Financial Advisor before You Hire Them?
Hint: It has everything to do about money.
In particular – your money.
In this podcast, I address the #1 question you should ask your financial advisor before you agree to hire them.
I then dive into the different ways that advisors get paid including how I get paid.
Ask your advisor, “How do you get paid?”
- In the financial services industry, there are many different ways that advisors get paid.
- Compensation is slightly different with every financial planner
- Charges are not always very transparent; it can be very frustrating if you don’t know what you’re paying for.
- When you ask this question, you’re checking the advisor’s response. They should be able to articulate what you will pay and how much they will get paid, so that you have a clear understanding of what is leaving your account each month/quarter.
- If they answer in a way that makes you uncomfortable (if they don’t clearly explain this issue, or if they dodge the question entirely), thank them for their time and move on to the next advisor.
How different advisors get paid:
- Advisor gets paid by selling you a product. When they sell, they get paid a commission.
- Commissions vary on the type of investment product.
- Example: if an advisor sells you a front-loaded mutual fund, the commission starts off at 5.75%, then goes down depending on how much you invest. You get discounts for investing larger amounts of money. So, if you invested $10,000 into a front-loaded mutual fund, the advisor will get paid $575 upfront, which comes out of your investment.
- After the initial commission, the advisor makes a small “trill,” which is approximately 0.25% ongoing, but if you never invest into that mutual fund again, the advisor only gets that one upfront commission.
- When I first got started in the business, we were often encouraged to sell front-loaded mutual funds. The selling point is that if you buy a mutual fund and hold it for 7+ years, paying the upfront cost makes sense. You still have the ongoing costs, but other methods can be more expensive.
- I realized that the buy-and-hold strategy doesn’t work too well. If you need to change to another mutual fund 2-3 years down the road, then you pay another commission.
- Going the commission route depends a lot on strategy and what you’re trying to achieve, but it often ends up being more costly for the client.
- You can switch mutual funds within the same company without incurring another sales charge, but just because a company has many mutual funds, it doesn’t mean that they are all good.
- This type of advisor can sell life insurance (term, whole), stocks, bonds, annuities (variable, fixed, index, etc.).
- Typically, the longer the term of the annuity contract, the greater the commission.
- There are different licenses to get commissions. Selling stock = Series 7 license, selling mutual funds or certain types of annuities = Series 6 license, and selling other types of annuities or insurance products = insurance license, EXCEPT in the case of a variable annuity, which requires a Series 7 license.
- If an insurance agent is coming across as a comprehensive financial planner, but all they have is an insurance license, the only thing they can offer is an annuity or life insurance.
- No stocks, no bonds, no mutual funds – not really “comprehensive.”
- After asking how your advisor gets paid, ask him or her what kinds of licenses he or she has.
- This can get confusing with Fee-Only advisors.
- This type of advisor is a “hybrid” of the Commission and Fee-Only advisors. Fee-Based can make a commission by selling a stock, bond, or mutual fund OR they can charge a fee based on the percentage of assets under management.
- Example: if you have a $100,000 portfolio and the advisor charges 1%, you will pay $1,000 per year for that advisor to manage your portfolio.
- Depending on how the advisor works, you might incur transaction charges, but you will not be dealing with commissions.
- This type is the most recognized as the least likely to take advantage of a client.
- Fee-Only advisors can charge hourly/on retainer (which is an upfront charge)/percentage of assets under management.
- There may be financial planning fees, which are separate from investing fees.
How do I get paid?
- I am a fee-based advisor.
- When I first started in this business, I had a Series 7 license. I sold front-loaded mutual funds, annuities, and term life insurance.
- When I started Alliance Wealth Management, I dropped my Series 7, and lost the ability to earn a commission on selling a stock or mutual fund. That doesn’t mean my clients can’t buy those products; they can, they just don’t pay a commission on them. All they pay is a percentage, which is the ongoing fee.
- I’m fee-based, not fee-only, because I retained my insurance license. I sell term life insurance and fixed annuities. Some clients want an income guarantee, and an immediate or index annuity can make sense for the client.
- When I first dropped my Series 7, I wasn’t really familiar with all the other types of annuities that existed but I lost some big potential clients because they didn’t want to do investment management, they wanted a guarantee, and I didn’t know what I could offer them.
- I quickly became well-versed in different annuities, and I found that there are good products for individuals with specific needs.
- With the term life insurance, it just didn’t make sense to drop my insurance license solely for the ability to call myself a Fee-Only advisor.