How Do Financial Advisors Get Paid?
Not all advisors are the same. In some sense, we have different things we do. We operate differently. Some are investment only. Some are insurance only.
Jacob:Some are a combination of those two things only. Or some do everything in terms of planning and investments and insurance, all of it combined into what we call comprehensive planning. Advisors do different things. Welcome to Retirement Answers, podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place.
Jacob:Hey there, my name is Jacob Duke, and each week I'll be walking through different tips strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Hey friends, and welcome back to another episode of Retirement Answers. My name's Jacob Duke. As always, I am your host.
Jacob:If you are a frequent listener, thank you so much for tuning into the show. I'm really glad that you're finding it valuable. If you're a new listener, well, welcome. I'm glad to have you here and I hope you find today's episode valuable for you. Go back and check out other episodes to see about more topics that might be helpful for you if you're thinking about retirement or already in retirement.
Jacob:Okay, so by the title of today's episode, you can see that we're gonna be talking about how advisors get paid. I think that this is a wonderful question or topic to discuss because it's something that I get a lot. Hey Jacob, how do you get paid? You know, whenever I start working with new clients and they're wondering how that works, I have to explain it often. And so I thought that this would do a great service for just people like you who are in the public, who are like, hey, how do advisors get paid and why is it so confusing sometimes?
Jacob:Now, before we jump into that, I wanted to highlight this week's listen review. It comes in from linksman63. He gives the show five stars and says, I've recently retired and found Jacob's advice to be simple, concise and easily understood. Jacob really breaks down retirement needs to a level that is well understood by the average person. He keeps things basic about what, they will be facing in key pre retirement and retirement years, as well as giving you the tools to keep your taxes low as possible while ensuring your money is working for you.
Jacob:I actually emailed Jacob after one of his recent podcasts to clarify some of his comments, and he was very swift and terrific with getting back to me. I thank Jacob for all of his knowledge on retirement planning and execution. Well, I appreciate that review, and I'm really glad to hear that you have found the show helpful for you on your retirement journey. If you're like this person and you want to leave a comment or review, please do so either on Apple Podcasts or if you're on YouTube, can leave a comment down below. Or if you have a question, you can email me using that down below as well.
Jacob:So, with that said, let's go ahead and jump in and talk about how advisors get paid and some of the things that I think you should, I guess, know about whenever you're thinking about this. Okay, before we jump into how advisors can get paid and kind of the ways that that works, I wanted to just say on the front end that not all advisors are the same. In some sense, we have different things we do. We operate differently. Some are investment only.
Jacob:Some are insurance only. Some are a combination of those two things only. Or some do everything in terms of planning and investments and insurance, all of it combined into what we call comprehensive planning. Advisors do different things and they do different services, but they also can do it for different people. So, have some advisors who might work for only physicians or only dentists or only business owners or only people 50 with young families or, for people like me, I work with retirees specifically.
Jacob:So that's the demographic or the target audience that I work with and serve. And so, just know that every advisor kind of has hopefully a niche that they work well with. And for me, I work with retirees. That's what I do, help with retirement planning. But just because I do something a certain way doesn't mean I'm helpful for someone who's a physician in their early thirties trying to figure out how to make everything make sense financially, right?
Jacob:So that's part of it here whenever it comes to how advisors get paid. Just know that not all advisors are the same in terms of the service they provide. But then also you have to understand that not all advisors are the same in regards to how they are able to operate. So, some are what we call captive, meaning they operate or serve a certain company, and they work for that company to sell or do whatever services that company requires of them. Other advisors can be independent advisors, meaning they have the opportunity to use whatever products they'd like to use or provide whatever services they'd like to provide, and they don't really have a company telling them what they have to do.
Jacob:And so there's different pros and cons kind of across the board there. Also, you have to think about whether an advisor is a fiduciary or not. And so do they have to act in your best interest 100% of the time or do they not? So just know that advisors in general, it's easy to kind of lump everyone into the same category and it's just not helpful because all advisors do different things or operate in different capacities. Also, whenever we think about it this way, we also call advisors different things.
Jacob:So we've got different names. We've got financial advisor, we've got financial planner, we've got investment advisor, we've got wealth manager, we've got asset consultant or financial consultant. All of these different terms, in my opinion, they help describe the same thing. They help describe a financial advisor and just know that out of that, different advisors do different things. So, of the name, just know that advisors can do whatever they choose underneath that name.
Jacob:So for example, I like to call myself a financial advisor because that's just the most common term. It's easily understood. But does that mean I don't do investments? Or does that mean I don't do financial planning? No, I do both of those things as well, but I don't call myself an investment advisor and I don't call myself a financial planner.
Jacob:I call myself a financial advisor. Just know that the point of saying that is don't put any weight necessarily on what someone calls themselves. Because sometimes I get the question, hey Jacob, I'm working with a financial advisor right now and I'm really looking to start working with a financial planner. And I think that I understand what they're saying, but it's not necessarily about what someone calls themselves. So what you're really looking for is you're looking for a financial advisor who also does financial planning, right?
Jacob:Like you want someone who does the financial planning part. And so, just know that sometimes the name can be really confusing and it's not very helpful. So don't put too much stock in it or weight in it. So, advisors are different across the board and there's all the different kind of ways to segment advisors out. So just know that on the front end and that's gonna help us understand how advisors get paid as well.
Jacob:So, let's talk about that. Let's talk about how advisors get paid and there's really, there's two different ways that advisors can be paid, but there's three different categories or labels. So just kind of try to follow me here. We've got commissions. So an advisor can sell a product for a commission, such as an annuity, a mutual fund, or some sort of insurance policy.
Jacob:They can sell a product to earn a commission, and you're not technically the one paying them as the client. The company they're selling that on behalf of is the one paying them. So that's a commission. And then you have what's called a fee. And the fee is directly paid by the client to the advisor.
Jacob:There's no company telling what the advisor is gonna get paid, right? So you have fees versus commission. Those are the two types of ways that an advisor can get paid. Now, we've got different labels for these things. So you've probably, if you've done any research or kind of studied this at all, you've maybe heard of what's called a fee only advisor, right?
Jacob:Well, what a fee only advisor is, is someone who does not charge a commission ever. Meaning they do not earn commissions for anything they do. They don't earn a commission to sell an annuity. They aren't insurance licensed. They, don't sell mutual funds for commissions.
Jacob:They only, get paid by you as the client. That's a fee only advisor. So you pay them directly. A commission based advisor, which is one of the other three options here, is someone who only earns commissions, meaning they don't earn fees at all. And then you have something in the middle, what's called fee based.
Jacob:And so, it's a combination of those two things. It's a combination of fee only, and it's a combination of commissioned, and so you combine those and you get fee based. Now, a lot of confusion comes up here in terms of the definition of these things. Some people think that an AUM, which stands for assets under management, fee is only for those who are fee based. Meaning fee only people don't charge an AUM percentage fee, and commission people don't.
Jacob:Well, a fee based person doesn't necessarily only charge a percentage of assets. They can charge in multiple ways, right? Just know that it's a combination. They have the opportunity to charge a commission, but also can charge a fee. So that's the first thing you have to know is commissions versus fees.
Jacob:And then the three different labels we have commissioned, fee based, and then fee only. Hopefully that breaks that down just a little bit. Now, one thing here to know is that we've done, I guess, an okay job of explaining maybe the differences sometimes there, and I think there's still a lot of confusion for many consumers just like yourself if you're watching this. Just know that in my opinion, not one of those types fee only, fee based or commission is better than another, just inherently, like on its face. I think there are reasons that one could be better than others.
Jacob:But just know that by itself, none of them are better than another. They have different, you know, incentives or perhaps, you know, different, conflicts of interest that come into play. But a good advisor can be found in every single one of those arenas. Just know that. And so that's what I wanted to say before we kind of dive into some of these other things here.
Jacob:So those are the three different kind of labels we have for advisors. We've got commissioned, fee based, and then fee only. Most of the time nowadays people are hearing about this thing fee only, and they're like, oh, perfect, I'm gonna go hire a fee only advisor, that way I don't have to pay asset based fees or AUM fees. And that's a misconception because fee only advisors all the time across the board, they do charge AUM fees. Now, there's some that don't, obviously, but many do.
Jacob:And so, remember that a fee only advisor is not someone who does not charge an AUM fee. They're just someone who does not earn a commission for selling some sort of product. So, you have, fee only advisors that can charge hourly. They can charge a project based or a one time plan. They can charge ongoing subscription or an ongoing flat fee or an AUM fee, right?
Jacob:So there's all kinds of options there. The key is, is that you, the client, are the one paying them. There's no other intermediary or third party company that's paying the advisor on your behalf. So you know exactly how much that advisor is being paid. Fee based, again, can be all of those things.
Jacob:But if that person or that advisor is able to earn a commission, then they have to call themselves fee based from a legal standpoint. So they could be pretty much fee only across the board except for one term life insurance policy they sold three years ago, and they're still earning a little bit of commission on that. They have to call themselves a fee based advisor for better or worse. So difference of opinions there all across the board, not gonna get into that or even give you what I think about it. It's more or less, I want this to be educational and helpful for you so that you are informed when making decisions.
Jacob:So some of the questions that a lot of people have too, are gonna be, well, should I pay hourly? Should I pay project based like one time plan? Or should I pay an ongoing service such as an AUM based fee and help with my investments and all those sorts of things? Or should I do only like a flat annual fee rather than an asset based fee? And the answer is, as well, they're just different.
Jacob:You know, some people need one particular service, some people need a different type, and, that's for you to decide. The key is, is you can go find which one is best for you because there are all the options out there. There are plenty of advisors who are AUM, that's probably the most common. You have plenty of advisors now who are hourly or project based, and none of them are better than another. What I think you should be on the lookout for is who provides the service I'm looking for and who does it to the best of their ability, who does it really well, and who solves my problems.
Jacob:Right, so it's not necessarily, I think you should focus less on how someone gets paid and you should focus more on are they actually helping me? Are they actually solving the problem I have? As opposed to bouncing from hourly advisor to hourly advisor to hourly advisor or AUM to AUM to AUM. It's like, who is the right person for me? Like, go find that person, and then however they charge is however they charge.
Jacob:If they charge appropriate rate based on the value provided, then it makes perfect sense to do that engagement. So just know that not any of these are necessarily better than another, and they still all come with conflicts of interest. Like, for example, a commission advisor, they're incentivized to sell a bunch of products that you may or may not need that might be really high commission, right? So they have that incentive or that conflict of interest to do that. An hourly based advisor, they could be incentivized to say, well, it's really only gonna take me thirty minutes to figure out the answer here, but I'm gonna book three hours because I need to actually make some money on this.
Jacob:And so there is that conflict of interest as well. An AUM person says, well, if I have more money invested in this person's account, I can get paid a higher amount on that because it's based on the account balance. So what that does is if someone says, well, hey, Jacob, I want to pay off my house or pay off a car or take some money out to do a real estate investment, that means that if that money leaves the account, I'm not going to get paid on it. And that conflict of interest is for me to figure out, hey, am I going to advise my client in their best interest to do what I think they should do rather than focus on whether or not I'm going get a fee for it. And then finally, you know, flat fee advisors, they technically don't have any incentive or reason to make sure that the plan that they're presenting actually works itself out because once they get paid on the front end, they obviously are probably doing a good service for you, but whether or not it works out, that's for you to figure out once you have the plan.
Jacob:So, there's conflicts all across the board here. Just know that there's not a conflict free situation or type of fee arrangement. Just know that you can find the one that's best for you. So here's some big takeaways for you. The first one is, is you need to understand how your advisor gets paid.
Jacob:Like you need to understand what they're getting paid and how that works. If you don't, go ask. If you're trying to find an advisor, then that's one of the questions you can ask on the front end. How do you get paid? The second thing is, do you feel like that advisor has your best interests at heart?
Jacob:Meaning, are they looking out for you instead of looking out for themselves? And that's something that I think that, you know, can be talked about, but I think it's more or less you as a consumer. You can kind of get that feeling. You understand who is or isn't looking out for you and providing the service you're really looking for. And then finally, third big takeaway here is, are they providing more value than the fee that they're charging?
Jacob:So here's a perfect example. Let's say that an advisor costs 20,000 a year to work with them. And you're like, man, that's a lot of money. Well, you're right, that is a lot of money. But if they are able to add 50,000 or a $100,000 of value every single year in return for that fee, in terms of you would not have that if you didn't have them, then if you were to get $50,000 of value for a $20,000 fee, well, that's a $30,000 delta, meaning you're gonna get $30,000 more value every single year that you're engaging with them.
Jacob:So would that be something you would do? Probably, right? So the question is not so much how much is the fee, which is the question most people ask. I would say, how much is the value? Right?
Jacob:Understand that you have an obligation, I guess to yourself, to say, is there more opportunity? Can I do this better? And what is the cost of doing that? If that cost is less than what you're going to receive in terms of value returned back to you, then it makes sense to go on that engagement or work with that advisor. So those are the three big takeaways.
Jacob:Understand how your advisor gets paid. Do you feel like they have your best interests at heart? And are they providing more value than the fee? So, I hope this quick discussion on fees, has been helpful. It's one that's kind of a sticky topic or discussion to go through with anybody because everybody has opinions and thoughts and what's right or what's wrong.
Jacob:And so, if nothing else, I wanted this just to be informational. I wanted it to be educational so that you can be informed as you go into these conversations, understanding that not all advisors are the same. All of them probably charge differently. Some charge more, some charge less. Maybe the cheapest isn't always the best option.
Jacob:All these different things. And so hopefully this gives you an idea and helps you understand what you should or shouldn't be aware of as you go into these conversations. So if it is helpful, please leave a comment if you're on YouTube, but then also if you're on Apple Podcasts, leave a rating and review there. That helps other people find the show. So with that, I appreciate you being here and we will see you next week.
Jacob:Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, wanted to remind you that nothing discussed in today's episode is meant to be financial, legal or tax advice. Retirement Answers is for educational purposes only.
Jacob:Thanks for tuning into this week's episode. I look forward to talking with you again next week.
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