Incentives are one of the most powerful economic forces in the world. It doesn’t matter what industry you’re looking at, you can typically draw a straight line between the incentives offered to an individual and the way they go about performing their job.
Take for example a problem Fedex had many years ago. Logistically, Fedex had a hard time transferring cargo quickly from plane to truck. The employees responsible for these tasks were paid by the hour resulting in a situation where they were effectively incentivized to drag their feet and draw out the loading process.
Fedex eventually experimented with switching pay to be by the worker’s shift that day and the problem cleared up overnight.
Another example sees a hospital in England issuing bonuses to employees if average emergency room wait time stayed under certain levels. The result of this incentive led to ambulances circling the block to avoid admitting additional patients when wait times were high.
Obviously, when the public got wind of what was going on, this incentive structure was quickly scrapped.
As I’m sure the reader is aware, the financial industry has become notorious for conflicted incentive structures between salespeople and end-clients. Commissions, referral fees, kickbacks, and all sorts of other compensation structures lead to “advisors” making self-interested recommendations to clients that are not in their best interest.
Fortunately, there is a segment of the industry trying to do things a better way: Fee-only, fiduciary financial advisors.
Fee-only financial advisors make up a small subset of the overall financial advisor community. What sets a fee-only advisor apart is that all of the compensation the advisory firm receives is directly from the clients they serve. They act as fiduciaries when working with clients and their financial needs.
There are different ways fee-only advisors may structure their fees. Most advisors operate by charging a fee on the investment assets a client places under their management. For instance, an advisor might charge 1.25% of the value of the first $1,000,000 of assets they manage, 1.00% on the next million dollars, and 0.80% thereafter.
Other advisors may charge a flat or retainer fee for access to advice or planning from the advisor. Some advisors charge through an hourly arrangement, similar to how and accountant or attorney may be accustomed to billing. It’s also common to see fee-only advisors employ set, project-based fees for delivering one-time financial plans.
The key is that the fee-only compensation model better aligns the interests of the client with the incentives of the advisor. Fee-only advisors are fiduciaries. The advisor is working for the client, not an insurance company, bank, or brokerage house. This distinction is critical in that the advisor’s duty of loyalty is solely with the client – no one else.
Fee-based is different from fee-only. Fee-based advisors may charge in a similar manner to the compensation structures I’ve listed above. However, they may also receive compensation through a mutual fund company for placing their clients in certain funds or from recommending insurance products and the like.
This distinction can be hard to spot simply through browsing a firm’s website and marketing materials. Our best recommendation is when interviewing a potential advisor, ask them directly about how they are compensated.
If their answer seems hesitant, or if they seem to answer the question in a round-about manner, they probably aren’t actually fee-only advisors. Walk away and find someone who can clearly answer where they compensation comes from.
At Ferguson-Johnson Wealth Management, we operate as true, fee-only financial advisors. 100% of our compensation comes directly from our clients.
The majority of our clients work with us as full-service wealth management clients. Which is to say, we manage their investment assets, build and deliver financial plans, monitor their financial readiness relative to their goals, and provide them on-going investment counsel for any and everything that might pop-up related to their financial lives.
For these services, we charge a percentage fee on the client’s assets that we manage. Typically, this fee begins at 1.00% annually of the assets under our management and tiers down to a lower percentage for larger sums placed under our management.
Some clients choose to instead engage us just for financial planning related advice. In these situations, we typically work for our clients at either an hourly rate or on a project-based arrangement.
In all cases, the only compensation we receive is directly from our clients. We have no incentive to recommend any particular product or investment. This allows us to utilize the products and services that are in our clients’ best interest and to operate with minimal conflicts compared to a banker at Wells Fargo or a broker at Merrill Lynch.
Here are Ferguson-Johnson Wealth Management, we are fee-only advisors who take the fiduciary obligation we have to our clients very seriously. We embrace this banner. It’s the right way to deliver financial advice, in our opinion. Give us a call or fill out a contact form on our website to get started and meet our team.
Don’t make a mistake by working with the wrong financial advisor. Ask the right questions the first time to determine if a financial advisor is right for you.