There is a simple but undeniable truth in the financial consulting and wealth planning industry that Wall Street has kept as a “dirty little secret” for years. That dirty little, and nearly always overlooked secret is THE WAY YOUR FINANCIAL ADVISOR IS PAID DIRECTLY AFFECTS THEIR FINANCIAL ADVICE TO YOU!
You want, and deserve (and consequently SHOULD EXPECT) unbiased financial advice in your best interests. But the fact is 99% of the general investing public has no idea how their financial advisor is compensated for the advice they provide. This is a tragic oversight, yet an all too common one. There are three basic compensation models for Financial advisor Singapore – commissions based, fee-based, and fee-only.
Commission Based Financial Advisor – These advisors sell “loaded” or commission paying products like insurance, annuities, and loaded mutual funds. The commission your financial advisor is earning on your transaction may or may not be disclosed to you. I say “transaction” because that’s what commission based financial advisors do – they facilitate TRANSACTIONS. Once the transaction is over, you may be lucky to hear from them again because they’ve already earned the bulk of whatever commission they were going to earn.
Since these advisors are paid commissions which may or may not be disclosed, and the amounts may vary based on the insurance and investment products they sell, there is an inherent conflict of interest in the financial advice given to you and the commission these financial advisors earn. If their income is dependent on transactions and selling insurance and investment products, THEY HAVE A FINANCIAL INCENTIVE TO SELL YOU WHATEVER PAYS THEM THE HIGHEST COMMISSION! That’s not to say there aren’t some honest and ethical commission based advisors, but clearly this identifies a conflict of interest.
Fee Based Financial Advisor – Here’s the real “dirty little secret” Wall Street doesn’t want you to know about. Wall Street (meaning the firms and organizations involved in buying, selling, or managing assets, insurance and investments) has sufficiently blurred the lines between the three ways your financial advisor may be compensated that 99% of the investing public believes that hiring a Fee-Based Financial Advisor is directly correlated with “honest, ethical and unbiased” financial advice.
The truth is FEE-BASED MEANS NOTHING! Think about it (you’ll understand more when you learn the third type of compensation), all fee-BASED means is that your financial advisor can take fees AND commissions from selling insurance and investment products! So a “base” of their compensation may be tied to a percentage of the assets they manage on your behalf, then the “icing on the cake” is the commission income they can potentially earn by selling you commission driven investment and insurance products.
Neat little marketing trick right? Lead off with the word “Fee” so the general public thinks the compensation model is akin to the likes of attorney’s or accountants, then add the word “based” after it to cover their tails when these advisors sell you products for commissions!
FEE ONLY Financial Advisor – By far, the most appropriate and unbiased way to get financial advice is through a FEE-ONLY financial advisor. I stress the word “ONLY”, because a truly fee ONLY financial advisor CAN NOT, and WILL NOT accept commissions in any form. A Fee-ONLY financial advisor earns FEES in the form of hourly compensation, project financial planning, or a percentage of assets managed on your behalf.
All fees are in black and white, there are no hidden forms of compensation! Fee-Only financial advisors believe in FULL DISCLOSURE of any potential conflicts of interest in their compensation and the financial advice and guidance provided to you.
Understanding the conflict of interest in the financial advice given by commission based brokers enables you to clearly identify the conflict of interest for fee-based financial advisors also – they earn fees AND commissions! Hence – FEE-BASED MEANS NOTHING! There is only one true way to get the most unbiased, honest and ethical advice possible and that is through a financial advisor who believes in, and practices, full disclosure.
Commission and Fee-Based financial advisors typically don’t believe in or practice full-disclosure, because the sheer magnitude of the the fees the average investor/consumer pays would surely make them think twice.
Consider for a moment you need to buy a truck specifically for towing and hauling heavy loads. You go to the local Ford dealership and talk to a salesperson – that salesperson asks what type of vehicle you’re interested in and shows you their line of trucks. Of course, to that salesperson who earns a commission when you buy a truck – ONLY FORD has the right truck for you. It’s the best, it’s the only way to go, and if you don’t buy that truck from that salesperson you’re crazy!
The fact is Toyota makes great trucks, GM makes great trucks, Dodge makes great trucks. The Ford may or may not be the best truck for your needs, but the salesperson ONLY shows you the Ford, because that’s ALL the salesperson can sell you and make a commission from.
This is similar to a commission based financial advisor. If they sell annuities, they’ll show you annuities. If they sell mutual funds, all they’ll show you is commission paying mutual funds. If they sell life insurance, they’ll tell you life insurance is the solution to all of your financial problems. The fact is, when all you have is a hammer… everything looks like a nail!
Now consider for a moment you hired a car buying advisor and paid them a flat fee. That advisor is an expert and stays current on all of the new vehicles. That advisor’s only incentive is to find you the most appropriate truck for you, the one that hauls the most, tows the best, and is clearly the best option available. They earn a fee for their service, so they want you to be happy and refer your friends and family to them. They even have special arrangements worked out with all of the local car dealerships to get you the best price on the truck that’s right for you because they want to add value to your relationship with them.