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In this episode we’re going to talk about hiring a financial advisor and one question
You should never hire a financial advisor without asking first
This is the only one aio financial
Series with Bill and Jason we discuss personal financial issues including insurance
investments retirement planning estate planning and taxes
Little of everything Letta anything to do with personal finances
Absolutely. Well, thank you for joining us here
so
the question
Will just get right into it that you should never hire a financial adviser without asking first is how do they get compensated?
for what they do for you, so
there’s a lot of I
guess
Mystery about this within the industry for a lot of clients
So it’s not always transparent as far as how your advisor is getting paid
And so we want to kind of break it down for you the different ways that advisors get paid
What we believe is the best way to go and what you should look for
And then just kind of get into some of those details with you to help you make that decision
So when you’re looking for an advisor, you can make a well informed decision
Yeah, that’s a great question is how they’re getting compensated and there’s three main types of advisors. There are fee only
Fiduciary financial planners who are getting compensated only by the clients
there are Commission brokers or Commission advisors who are much more common than fee only and they’re getting
Compensated by the products. They’re selling to clients and
then there’s a mix this fee based or
Commission and fee
Advisers who are getting some of both they’re getting a fee from the client. Plus they’re getting compensated from the products. They’re selling
yeah, and so as you might guess the
the way that you’re probably going to be most
As an advisor is if you’re getting a flat fee
to manage the account or to manage their entire financial plan and
You don’t get paid for specific products because in the financial industry certain products pay a much higher
commission than others
So for example an annuity versus a CD a lot of times
You’ll see an advisor use an annuity in place of a CD or something similar to it
the annuity will pay a huge Commission the CD next to nothing if anything about so
That that’s the type of thing that you want to be considering
Because it may make a big difference to that advisor as far as what they recommend for you now both might be sort of
Okay, but how do you know that?
They’re really making that decision based on
What’s best for you versus what’s going to earn them a higher paycheck at the end of the month, so
yeah, and in addition to
the unbiasness if you’re compensated differently for different products, there’s also just the
Transparency of it. It’s not really clear in most cases how much the
advisor is getting
compensated by selling you a CD versus an annuity versus a bond fund versus
You know other products there can be upfront
Commissions that they get paid there can be ongoing
Payments that they’re receiving for this products for the products
There could be penalties
if you get out of the product like an annuity ahead of time that you might not be aware of so that they’re getting
Compensated no matter what once you you’ve gotten into it
So the unbiasness, but also just how much it is so the fee only advisors they’re charging you a fee it’s very clear
How much it is it’s their only compensation. There’s no other
Kickbacks for referrals or any other compensation that’s given to them
Yeah, exactly. So
you know something else too to bring up we were kind of looking at stats on this so out of about
300,000 financial advisors and financial planners in the US Oh only somewhere around
17% are on the fee only basis, so
It’s not the most common
I guess scenario out there
So if you currently have an advisor, it’s definitely worth looking into to see how they’re getting paid
And definitely if you’re you know shopping for a new one or the first financial planner that you’ve worked with
It’s important to understand that
Before you assign any sort of an agreement with them or decide to to start that relationship
And so, you know we we’ve talked a little bit about
You know why? It’s important
but I think another issue too is with comprehensive financial planning if you’re only
compensated by selling certain products
It may limit how much effort you put into the other pieces where if you’re compensated for working with someone
No matter if you focus on investments or it’s retirement planning and tax planning and other issues
You’re you’re getting compensated for your service. Not just we have to sell these certain products
And so that’s what we’re gonna focus our effort on
Right. Yeah
So there’s there’s not really much of an incentive to get to know them get that or get to know their needs
Unless it’s gonna lead to a sale
Versus if it’s just part of that comprehensive
package where you’re helping them actually plan for the future plan for the goals as
Opposed to just pick a product and put them in that for the commission. Yeah. Yeah, and I think you hear a fee-only or fiduciary
our fiduciaries our
advisors, who are
Putting the client’s needs first
They have this fiduciary responsibility to put the clients best interests ahead of any compensation
And so, you know, those are things you want to look for like Jason said fee-based
Sounds similar, but it’s it’s really they’re getting fees and commissions
mm-hmm, and so
Aside from the fiduciary standard. There’s also the suitability standard right? So that would be where
This is an investment that’s suitable for some investor
not necessarily the best for that individual in their
Situation, but it’s a suitable investment
So it’s okay, but it’s not necessarily tailor-made to what their goals are. Good point
You don’t see cases where an advisors taken to court because they picked something
That’s suitable. But but not the best option or it might have a high expense or a high commission
That’s still going to be in the industry
Acceptable. All right, so that’s just kind of another thing to watch out for so
Just kind of a maybe a list of things to ask your current advisor or to ask a prospective advisor
When you meet with them is just for them to lay it out for you exactly how they’re going to be compensated
for the services that they’re providing for you, so
And if they aren’t able to do that for any reason or they kind of dance around it
That’s a red flag. You want to make sure that you avoid an advisor?
They can’t clearly explain to you how they’re being compensated for the work that they’re doing right whether it’s ongoing
commissions the 12 b1 fees trailing, Commission’s
referrals to other services just what is it that they’re making money on and that will
Let you know, you know are they mostly compensated by in selling is by selling insurance?
Well, you can expect that’s probably gonna be your relationship with that advisor
Definitely and then, you know a few other things that are good to ask is, you know, find out what their credentials are
You know, do they have any?
Professional designations or anything like that?
You know experience in the industry. Yeah, when we were looking up statistics we found only about
87,000 of the
300,000 have CFPs, so it’s
You know, you definitely want to check if they have experience and what services they’ll provide
Is it just putting you in investments or is there gonna be?
comprehensive
support absolutely
And then another one is how many clients are they working with?
So that that’s another thing that can create a bit of a con flicked as well
If you have an advisor that’s working with more clients than they really can handle. They may be giving
90% of their attention to that top 50% of their clients and the lower 50% may largely get ignored so
Especially if you might be in that lower 50% of the clients, it’s important to know how many clients are they working with?
You know what? What sort of a structure do they have to make sure you’re you’re being followed up with on a regular basis
Yeah, if that’s what you’re expecting is some one-on-one time with this person
I mean I think average is about you can’t handle much more than a hundred clients per advisor
And so if they have a lot more than that, you can’t expect that. You’re gonna get a lot of attention
and knowing what their minimum or what their what their average I guess client size is and if you fall within that
You can expect to get their average service
And not be ignored. But if you’re way below their average, you might not get a lot of attention
Yeah any other thoughts on this or I think that’s good that that’s the key find out how they’re compensated definitely
Yeah
And so hopefully this gives you a good starting point when you’re looking for an advisor or if you’re evaluating the advisor that you’re working
with already
If you have more questions
Please let us know you can comment on this and also in the comments if you can let us know where you are
We’d love to know where our viewers are. We’re here in Tucson, Arizona. We love it here nice sunny weather
But you might be anywhere else in the world
So yeah, we work with clients all over so it’s yeah, it’s good to know who is finding us for sure. All right. Excellent
Well, please take the time to like this video and subscribe
We will be doing a serious. It’ll be more videos coming up with this this topic interests you
Definitely something to stay tuned
Yeah, great. Thank you.