Fee-Only Vs Commission: How Being a Fee-Only Fiduciary Helps CWM Keep Your Best Interests At Heart
How does your financial advisor get paid? And why does their payment structure matter to your wallet?
Most advisors get paid in one of two ways, fees or commissions. Fee-based advisors charge their clients a flat rate or an à la carte rate. Commission-based advisors earn commissions on financial transactions and products they sell.
It's important to note that all investment advisors are regulated by the state, or states, in which they practice or the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940. Both of which require advisors to adhere to regulations that are designed to help protect investors. Each of the following payment structures are legal, and each type of advisor operates under an ethical code. As you will see, however, some advisors may have a stronger incentive than others to put their clients first.
Let's look at fee vs commission-only advisors.
Fee-Only Financial Advisors
Fee-only advisors are paid directly by their clients. They may charge a flat fee, by the hour, or a percentage of the assets they manage. These professionals do not receive kickbacks for the products they recommend to clients.
A fee-only advisor is also often referred to as a fiduciary wealth manager. In this case, fiduciary simply means they are required to put their clients' interests ahead of their own. They also have a duty to act in good faith and trust. Advisors who are Registered Investment Advisors and Certified Financial Planners are also fiduciaries.
The fee-only advisor model largely began in 1983 when the National Association of Personal Financial Advisors (NAPFA) began with 125 members. Today, NAPFA maintains a membership of 2,400 advisors, and the amount of fee-only advisors has skyrocketed nationwide. CKAs (Certified Kingdom Advisors) are fee-only.
Fee-Based Financial Advisors
Many people believe that fee-based advisors are the same as fee-only advisors. Not so. While the two share much in common, they are not exactly the same.
Fee-based advisors receive payments directly from their clients, but they may also draw compensation from other sources. For example, a fee-based advisor could charge you for their advice and then receive a commission from a product they advised you to buy.
If this looks like a conflict of interest, that's because it is. This payment model sets up the advisor to fail either their client (you) or the financial company that also compensates them.
To stay on the right side of the ethical line, fee-based advisors must sell products that are suitable for their clients. Depending on the ethical compass of the fee-based advisor you are working with, the term "suitable" can have a narrow or broad definition.
Commission-Based Financial Advisors
A commission-based financial advisor makes money when their client purchases a product or service they are paid to sell.
For instance, a commission-based advisor receives commissions for:
Newly opened investment or savings accounts
Annuities sales
Insurance policies
Mutual fund loads
These advisors are still required to operate with their clients' best interests in mind, but they have a strong incentive to steer investors toward those products that make them the most.
Commission-based financial advisors do not charge their clients for their assistance. Some investors find this model attractive because it seems like they’re getting free service. It's a powerful marketing tool, but if you choose this approach, remember that the advisor is still getting compensated, just not directly from you.
If you are considering hiring a fee-based or commission-based advisor, ask for their Form ADV. A document which all advisors must file with the regulators. This document will tell you how your prospective advisor is compensated.
Benefits of Fee-Only vs Commission
While a commission-based financial advisor may offer excellent advice about an insurance product or other vehicle, there’s no way around it, these professionals have a powerful incentive to present select investments in the best possible light.
These advisors are also more likely to suggest frequent trades since they may receive a commission every time they buy or sell a product. These trades may or may not be in their client's best financial interest.
In contrast, fee-only pricing is the only structure that ensures that you do not create a conflict of interest between your financial accounts and your advisor's earnings.
Why Cooke Wealth Management Is a Fee-Only Advisor
At Cooke Wealth Management, we are a Chrstian financial advisory firm. To us, that means we are here to serve; to serve our clients, and serve the Lord.
We believe, above all, we are His servants. Practically speaking, we believe we are first His. We ultimately work for the Lord, answer to Him, and are here to serve Him. This is often why we do what we do, and shapes how we do it.
It is because of this that we also believe we are here to serve our clients.
In scripture, Peter says “Just as each one has received a gift, use it to serve others, as good stewards of the varied grace of God.” (1 Peter 4:10)
By serving others, we believe God is given the opportunity to work through and in us. We are here to serve our clients. To sit on the same side of the table with each of them, to help them identify what’s best for their family, and use money as a tool to accomplish the goals God has placed on their hearts.
We can't do that well if we divide our loyalties between our clients and our pockets.
As people of faith, we work to hold ourselves to the highest standards in the financial services industry, always prioritizing our clients' best interests above our own. We strive to be highly skilled at what we do and to provide guidance rooted in Biblical wisdom. We do not want to create a conflict of interest for ourselves by accepting commissions from financial institutions.
Therefore, we are a fee-only advisory firm. We believe that helps us keep your best interests at heart.
If you would like to learn more about fee-only financial advice, Biblical stewardship, or how you can create a customized plan for your retirement, contact us today. One of our advisors would love to speak with you.