A common misconception about the investment world is that the person giving you financial advice is either commission-based or fee-based. At The Asset Advisory Group we are neither. We are fee-only. This means that we do not receive any compensation from the investment companies whose products we use to implement our client’s financial plans.
A commission-based salesperson will always have a temptation to make a recommendation based on what would be best for themselves or the company they represent, not their client. I’m not saying this is intentional, but I have seen it happen time and again.
If a client comes to me with $500,000 to invest, I will charge them a 1% annual management fee and allocate their funds to low cost institutional no load mutual funds. I receive no compensation from the mutual fund company. If the same client were to walk into a broker’s office, they may end up with a $500,000 annuity which pays the broker a $24,000 commission. When looking at an immediate payout of $4,000 or $24,000*, which would most salespeople choose? And do you think they will continue to give on-going advice to this client or look for their next prospect?
There are many advisors that are fee-based which accept both an ongoing management fee from their clients as well as a commission from the company whose products they are selling. Sounds like a great plan – for the advisor!
While I feel very strongly that fee-only advisors have the best opportunity to serve the interests of their clients, the bottom line is to know how your advisor is compensated. Anyone who gives you financial advice should not have a problem revealing exactly how much money he will make based on his recommendations for your portfolio.
*assumes a 6% commission and an 80% payout on the annuity and an 80% payout on the management fee
Chris Carleton, CFP®