(Excerpted from Stop paying hidden investment fees! by Dean Kendall.)
Chapter 1: Who is Giving you Advice and What are their motives?
What would you call a person whose job it is to sell products on which they make a commission? If you said “Sales Person” you would be correct. It might say “Wealth Manager” or “Financial Advisor” or even “Trusted Advisor” on their business card, but you must learn to ignore their titles and the “brands” of the giant institutions for which they work. IGNORE! IGNORE! IGNORE! These are the tools of distraction and misdirection!
Instead, ask one simple question to any advisor whose advice you seek. How do you get paid? There is only one answer that is acceptable. “I charge a flat hourly fee for the advice that I give.” Or alternatively, “I charge a flat annual fee (in dollars NOT percentages) for a suite of services.” (You should receive a list of the suite of services and a timeline of when you will receive them.) This is how the best advisors work with their clients. This is how I work with my clients. It is the only way you should work with any financial institution or advisor.
How do you pay your attorney? Do they get a percentage of the value of every contract they write for you? NO! Of course not! How do you pay your doctor? Does she change her fee depending on your level of wealth? NO! Of course not! That would be unethical and downright crazy.
But not in the financial services world! Virtually everyone is on commission. Their favorite commission is called an Asset Management Fee. That means that they get a percentage of the assets they manage for you. Does your accountant get a percentage of your earnings every year? NO! Of course not! They charge you a flat fee to do your books or file your taxes. Paying a percentage of your assets for advice is ludicrous! Yet, that is how most people are charged, and because “everyone does it that way,” you assume it must be “right.” Don’t fall for it! It is just a commission in disguise and usually, a very high commission for the value received.
You should only pay a flat hourly fee for advice or a flat annual fee for a suite of services. Period. Everything else is just pure BS! There are some advisors who charge a flat annual fee (in dollars, not percentages) for a suite of services that includes integrated investment advice, tax advice, estate planning advice, financial planning, insurance reviews and more. That may make sense for you if you need all those services, but notice that in both cases the advisor is getting paid for their time at a flat rate and NOT on any kind of a commission on the “products” you buy. The fact that you are wealthy does not entitle them to a percentage of your wealth! If you are just getting started in the investment world, it is even more important that you don’t overpay.
It is critical for you to engage with fee-only advisors to ensure that you get advice that is always in your best interest and to ensure that there are no conflicts of interest. Beware of advisors who use the term fee-based. This is another form of commission that is supposed to sound like a flat fee. A flat fee should be expressed in dollars per hour or dollars for a suite of services. In either case, you will know exactly what you are getting for what you are paying and you will be able to make an informed decision.
There are “good guys” out there and they will all charge flat fees for the advice they deliver. Their goal, like your accountant, is to make a good living by giving sound financial advice that is tailored to your situation and needs. It is the way the entire industry should operate but generally does not.
Please don’t become so skeptical and jaded that you crawl into a hole or decide to go it alone. Getting the right advice can really accelerate the accomplishment of your financial goals and your ability to be living your ideal life years or decades sooner while paying lower taxes and having more cash in your pocket.
(Dean Kendall is a financial organizer with Ideal Life Experience Ltd. in Calgary. You can buy his book, “Stop paying hidden investment fees” here. Watch for a second excerpt next week.)
MORE ABOUT FINANCIAL ADVISORS:
- 10 ways for investors to be more boring —and successful
- Advisors don’t want to talk about cheaper alternatives
- Let’s put an end to embedded compensation
- Don’t fall for investment porn