Throughout history, our industry has done a good job of confusing the consumer about who “financial advisors” truly are and how we are compensated. The hundreds of titles and acronyms used to describe us and the many different fee-structures aren’t communicated well to investors and those we serve. There are various opposing views the industry has on how we should be charging for our services. So what are the different ways we can earn a living and what’s the best career path to choose?
Types of Fees
How we charge for our services has significantly changed over time. In the 1920s, we were solely compensated by commissions. Now, the many different fee-structures have changed and we have multiple options.
- AUM Fees: Compensated from a percentage of the assets under management from a single portfolio.
- Hourly Fees: Compensated by the hours worked for clients.
- Fee-only: Receive compensation from clients.
- Fee-Based: Receive fees from clients in addition to collecting commissions.
- Commissions: Compensation received from the sale of products.
Technically I operate as a fee-only, fiduciary financial advisor. I’m not fond of describing myself, by the way, I’m compensated. By calling ourselves fee-only or fee-based we’re putting the focus on how much our services cost. If we described ourselves by the advice we provide we’d more easily communicate the value, expertise, and guidance we deliver to our clients; we’d call it: advice-based financial planning.
Why Advice-Based?
- It’s much more ideal for a financial advisor to be sitting on the same side of the table as their clients
- If you’re being compensated by fees only, then your clients know that if you suggest a change to their investments, it’s in their best interest
- Easier to communicate: You make more when their balance goes up and less when it goes down
- Investors don’t need a sales person
- Investors need a financial caregiver
- Investors need financial guidance and someone to help find answers and achieve their financial dreams
- Become the problem solver and listener compared to the product provider, salesman, and stock and fund picker.
- Reoccurring revenue
- No sales pressure or sales award
- More freedom within your business model
- Lower stress environment
- You’ll spend less time chasing the market and prospects and more time enjoying your entrepreneurial business and personal life
If our industry focuses on what we can control, fear and emotions, instead of what we can’t control, the market, then we’d be much more successful. The financial world seems complicated to the general public. Transparency and having our clients best interest in mind is the only way our profession survives.
The bottom line is if we continue down the road of commissions, hidden fees, and product pushing, we’ll lose the trust of investors. Evolving to an advice-based, entrepreneurial business, is a much more elegant way of operating. You eliminate scarcity, you focus on building genuine and strong relationships, and you serve people; allowing for a much more rewarding career path than a product pusher.
If you found this article helpful be sure to check out “10 Topics to Discuss at an Initial Client Meeting.”
