Why pay adviser fees?

A tourist in New York’s Greenwich Village decided to have his portrait sketched by a sidewalk artist. He received a very fine sketch, for which he was charged $100.

“That’s expensive,” he said to the artist, “but I’ll pay it because it is a great sketch. But, really, it took you only five minutes.”

“Twenty years and five minutes,” the artist replied.

-Thomas Sowell

There are basically three compensation systems for financial advisers.

The system depicted on the right is Fee-Only. There is no compensation coming from other companies or entities. The fee payment method may be hourly, retainer, asset based, or others. The advisers ADV* and answers to your questions tell you how the fee is determined. This system is process focused. Clearly you need to invest or get insurance but there is no compensation to the adviser by product manufacturers … thus the focus is more on the why (goals) rather than the what (product). You have a clearer idea what you need and why.

I am Fee-Only. I will sketch out what your situation looks like. At the time of this posting, I have over 18 years … plus the time with you … of experience.

 

The system depicted below left is commission only … most often perceived by the “client” as “free” since they don’t see the money paid to the adviser. The question here is whose interest is being served? It is also product focused – you will have conversations about features and benefits.

The system depicted below right is fee-based … a mix of fee and commission. This system also raises the question whose interest is being served? It may also may create the illusion of the system at the top, but may really be more like the system below left, especially if fees you pay to the adviser are waived if you purchase a product. You may have more goals conversations than that on the left, but also features and benefits of the products as well.

Careful questioning is required to determine whose interest is being served and what the compensation really is.

 

Story: Thomas Sowell: Basic Economics: A Common Sense Guide to the Economy, page 439.

*You may access my ADV by clicking here (Firm #155213 … then click on “Part 2 Brochures” link).

 

 

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