Fee Compensation
You can compensate advisors three ways: fees, commissions, or both. The Paladin Registry strongly believes the appropriate way to pay for financial knowledge, advice, and services is with one of the three types of fees.
Types of Fees
There are three types of planning and advisory fees:
- Asset-Based Fees
- This type of fee is based on a percent of your assets.
- For example, 1% of $500,000 is a $5,000 annual fee.
- Asset-based fees are usually billed quarterly in advance or arrears.
- Most advisors charge an asset-based fee for their investment advisory services.
- Fixed Fees
- A fixed fee ($2,000) is charged for a specific service such as the development of a retirement plan.
- Most advisors charge fixed or hourly fees for their planning services.
- Hourly Fees
- The fee is based on number of hours times the advisor's hourly rate.
- This method of compensation is most similar to the way you compensate other professionals.
- Most advisors charge fixed or hourly fees for their planning services.
- Integrated Services
- Some advisors combine their planning and investment services together and charge one asset-based fee.
Commitment
There are three types of advisors based on their methods of compensation:
- Fee-Only Advisors
- Their only method of payment is one of the three types of fees.
- Fee-Based Advisors
- They have two methods of compensation: The three types of fees and commissions from investment and/or insurance products.
- Commission Advisors
- This type of advisor is really a sales representative.
- Their only method of compensation is commissions.
Direct Payment
The only way you can pay an advisor direct for his or her services is with one of the three types of fees. Your advisor sends you an invoice and you pay it or the advisor bills one of your investment accounts.
- You want to be your advisors' only source of income for his or her advice and ongoing financial services
- You want to minimize your risk of potential conflicts of interest.
- You want to pay a fee for specified services that help you achieve your financial goals.
Aligned Interests
Asset-based fees are the ideal way to pay for investment services because your financial interests are aligned with the advisor's. For example, when your assets increase in value the advisor's fee increases. When your assets go down in value, the advisor's fee declines. This method of payment motivates the advisor to help you grow your assets.
Conflicts of Interest
Fees, as the method of payment, also have fewer potential conflicts of interest. That's because you are the source of the payment and not third parties. They will never admit this conflict, but advisors who are paid commissions by third parties have the potential for serious conflicts of interest. For example, they sell you the product that pays the highest commission versus the best product for your situation. Also, commission reps are not paid to help you achieve your financial goals and they do not provide ongoing wealth management services.
Declining Schedules of Fees
Asset-based fee schedules decline as your asset amount grows. This is called a sliding schedule of fees. The more assets you place with a single advisor the lower your fee will be on incremental assets.
- For example, an advisor charges a 1% fee on the first million dollars of assets and .75% on the next million.
- Multiple advisors do not increase your diversification. In fact, they can reduce it by duplicating holdings.
- From an expense point of view, it pays to put your assets with one advisor.
Ongoing Services
Commissions are usually one time payments that reward advisors for selling investment and insurance products. Commissions are not compensation for providing ongoing advice and services. On the other hand, advisors are paid quarterly and annual fees to provide ongoing advice and services that help you achieve your financial goals.
Fees & Commissions
You should be very cautious when advisors charge you fees and commissions. Sometimes this is referred to as double-dipping and the regulators frown on this practice. You should not pay a fee and commission for the same service. Advisor who charge both types of compensation should be required to provide full disclosure for all of their compensation and the services you received for that compensation.
Stopping Your Advisor's Compensation
Sales representatives are paid commissions at the time of the sale. If you are unhappy with the rep's sales recommendations you can terminate your relationship with the rep by not buiying any additional products from him or her. However, you can't do anything about their sales compensation because they were paid a long time ago
Advisors are paid fees to provide ongoing advice and services. If fee advisors don't meet your expectations you can terminate the relationship and the advisor's compensation stops. This is additional incentive for advisors to meet your expectations - you control their future compensation.
