Understanding the value of your financial advisor.
Advisory fees are a big topic of discussion these days – even more so since portions of the DoL Fiduciary Ruling became effective in June this year. This ruling exposed the conflicts of interest between advisors and their clients, providing better transparency for investors when it comes to understanding why their advisors recommend certain strategies – or what is included in their advisory fees. Still, investors are often times skeptical if they are getting what they pay for – which is a very good question to ask.
There is a long standing perception that, when the numbers are either level or down, the only person making money on a portfolio is the advisor. This has prompted investors to question if they are getting what they are paying for when it comes to advisory fees. Some investors may even question why advisors aren’t using a performance-based fee model. The idea here being that the advisor takes a percentage of the profit from the portfolio, and if there is no profit, then the advisor takes nothing.
While this structure could in theory help the investor avoid fees, it could also cause more harm than it could help. If advisors were driven by performance, they may be more inclined to recommend riskier investments and strategies that could have the potential for big returns. The problem being that, while those returns could be great, the investments are still risky – and the underlying risk to achieve those returns could also be greater.
An advisory fee may appear as only beneficial to the advisor, but the fact of the matter is that financial advisors should be there to provide objective advice, they should be well educated when it comes to the financial world, and they shouldn’t recommend risky investments in exchange for an increase in performance-based fees and compensation.
Another consideration is the advisor’s transparency. There are advisors who run commission-based businesses, basing their compensation off of products (securities, insurance etc.) that provide them with a commission.
Unfortunately, for advisors who run with this business model, things are starting to get a little tough. The new Fiduciary Rule could have the biggest impact on these professionals because it demands that advisors act in their client’s best interests – above their own. Commission-based consultants have the potential to recommend products based on their compensation, not if the product was a good fit for the client.
The hope is that advisors are transparent with their clients, letting them know what the options are, what the costs are, and if there could be a possible conflict – including commissions to the advisor. In addition, just like the performance-based advisor, recommendations founded on compensation levels could do more harm than good.
What does value mean to you?
Paying a fee to an advisor is a pretty standard practice – and while having to fork over a percentage of your portfolio to your advisor can be hard to swallow, what needs to be determined is if the advisor is providing value and transparency for that fee.
Keep in mind that these fees may include more than investment advice. They can also include financial planning service fees, use of digital planning tools, research, and other business operation expenses. Just like the price paid for a fast-food hamburger probably includes the cost of the paper it is wrapped in, advisors are still running a business, and all businesses do have operation costs.
Some questions to consider when trying to figure out if you are getting what you pay for:
- If your advisor was hired to manage your investments, are they actively monitoring your portfolio and keeping in good communication with you?
- Are they providing a financial plan for you as well? If so, are they communicating about any and all planning options – including income tax considerations, estate planning, retirement planning, or insurance planning.
- Is there transparency when it comes to the fees behind the products or investments they are recommending?
- Are they providing you fair and balanced financial advice?
Determining the value of financial advice will range depending on what exactly the advisor is contracted to advise on. Many times financial advisors are managing more than just investments, and this needs to be considered. Many advisors provide knowledge and understanding in a wide range of financial areas – investment management being one of them. Moreover, advisors who act as fiduciaries should be creating portfolios and financial plans, or recommending investment and insurance products, based purely on the client’s needs – never their own.
With this information in hand, can you say that your advisor is giving you what you pay for? If no, then maybe it’s time to consider talking to a financial professional who can.
Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 17-547