Happy day to you. This is Ken Kaufman. And I’m thrilled you’re here for Episode Number 98, “Commission or Fee-Based Advisor.”
Now, those of you that have listened to my podcast for a while, you know that I don’t always go down just the traditional grain and pick one or the other, and this is gonna be no different. I don’t like either one of these options. I’ll be honest, I think that both have their sets of flaws. And I have what I think is a superior method, especially for people who want to be do-it-yourselfers.
Now, if this is your first time ever investing or trying to put a financial plan together, if you don’t have any experience with it, and you don’t have a desire to really learn these things for yourself, but you just want to trust somebody to take care of it for you, then these may be a more appropriate option.
I’m just gonna cut right to the chase. I work with somebody, he calls it the BLUF, which is an acronym B-L-U-F, which is Bottom Line Up Front. I think the premier way to get financial advice is to work with somebody on an hourly basis, who will sit down and spend the time and you be willing to spend the money to put a comprehensive financial plan together. Not going in and having some acute, tiny need out of your overall financial life addressed or a product sold so that somebody can make a commission or earn fees on it.
I am a big proponent of the comprehensive financial plan, and that everything that you do in your financial life has its part that it plays within the overarching financial plan, and it reaches to taxes and insurance and investments and savings and budgeting and all the legal like around wills and trusts and all of these things. It’s a very, very broad look. And I believe the absolute best way to go at this is to get somebody who will help you build out a robust plan and then will update it as you see fit or as they recommend based on your situation and as things change, and so on. And you just pay them an hourly rate and then everybody parts ways until the next time that you come back together.
So let me jump back now to a commission advisor. This is somebody who for selling you a financial product will receive a commission, not from you, but from the company that’s offering that product. They, in essence, are an agent. I don’t mean to use the wrong words here, but they are in essence an agent or contracted with this company. And as you put your money into the investment vehicle or as you spend the money there, they receive a commission from that company.
And so in essence, you’re not paying them, but you really are paying them because all that happens in…I mean, this is true not just in financial services, but in the world, is when a company has somebody selling their products for them, they are paying them a commission or there’s a portion of the sale that is going to be allocated to them. And that’s what you get with working with somebody in the financial world that is paid on a commission basis.
Now, some parts of the financial services world, it’s kind of the only option. For example, when you buy automobile insurance or homeowners insurance, those insurance agents are generally paid just on a commission. The reason why I struggle with the commission-based is because what I’ve found, generally speaking, and I know that there are exceptions to this. And I hope some people take exception to my opinion here because by no means am I saying I’m absolutely right for everybody. I believe that each one of these types of advisors has their place and add value.
I think that somebody who’s paid commission for selling you a product or a series of products does not have the right alignment to sit down and really build you out a comprehensive plan. Because what would happen is, when they build that comprehensive plan, there would be parts of it or things, if it was built out truly from an independent perspective that would be recommending the very best ways for you to accomplish your financial plan. And it’s just something you have to be very careful of and very wary of.
And I’ve been in and around the financial services world for basically all of my life, or at least from about my senior year in high school and on, and I just know it and I know the mentality and I know how those things go. And generally, they’ll say, hey, yeah, we’ll build you a plan but basically, the purpose of the plan is to get you to buy the commission product, not necessarily put the whole comprehensive plan together. So that is the challenge I have there.
I believe there are some people that are commission-based that will be altruistic and try to do their very best to build out a plan. I just don’t see it all that often. And again, I’d love for people to prove me wrong on this.
The second option here is a fee-based advisor. And this is somebody who gets paid usually based on assets under management, or it’s called AUM. And it means when I invest money with them, they’ll charge 0.5% or 1% or 2%, of whatever my account balances are, and they have enough clients that those small percentages add up and it provides a nice income for them, once they build up their clientele in this, what’s called AUM or assets under management.
This can be a decent way to go at it. Again, their focus is on gathering up your assets, not always on building out the perfect comprehensive financial plan. Now there are some that do it, and probably do a really good job at it. I guess I need to pause here and just be super clear, when you’re going to work with anybody that is helping you with your finances, you should be very upfront and direct and ask them, how are you getting paid? And if they say I’m commissioned based, then you know what may happen in the process. If they say I’m fee-based, or I charge assets under management, you as a consumer have an absolute right to know how they’re getting paid.
And the fee-based advisors generally just deduct it out of your account balance every year so you’re not actually physically writing them a check and you’re not feeling pain, and all of a sudden, you could be paying them $2,500 a year or $5,000 a year, $10,000 a year. Or maybe think of it this way, if your investment portfolio based on what it was invested in was earning 10% a year and they were charging 1%, that’s taking 9%. That’s 10% of your portfolio’s growth that they’re taking away from you every year. That may be worth it. I’m not gonna be the judge of whether or not you feel like it’s worth it, but how motivated are they to build out this whole comprehensive plan and help you execute on it? I hope they would be. And like I said, I think there are some that are. You need to know how they’re compensated and then make sure you’re getting the bang for your buck.
That’s why I defer to this third option, which is where you find somebody who will build a comprehensive plan and you pay them just to create the plan. Not to show up and recommend products, not to show up and figure out how they’re going to make money on selling you the products or gathering up your assets at the custodian where they’re gonna be paid the highest percentage out of the assets under management, or you know, the highest commission.
I like knowing that this is an independent person, and I’m hiring them for one job and one job only, and it’s to help me build a comprehensive financial plan and keep it updated. And then perhaps you build a great relationship with them and they do, besides the hourly rate, they’re a fee-based advisor and you feel comfortable investing your assets with them. Great, then do that. And maybe they’ll give you a discount on your hourly rate, or they would charge you less in future years, or something like that. I just like going into the relationship where it’s platonic, and they don’t have any weird motives and incentives other than you just tell them I need an amazing financial plan built for me, and I need a relationship with somebody who will do that on an hourly basis.
And you know, be ready to pay. Don’t think, oh, I’m going to nickel and dime them, and I’m just going to pay a really low hourly rate and tell them they only get a minimum of two hours or three hours to build the plan. Now maybe if things are…you know, if you’re at a point where your financial life isn’t too complex yet, maybe they could get something done that quickly. But if you really want somebody to look out and project and say, hey, when you’re 100 years old, this is what your life is going to look like, when you’re a 90 year old, 60 years old, 40 years old, wherever you’re at. But they’re building out this plan into the future for you. You really want somebody who is just going to be comprehensive in the way that they approach that, and you pay them for it and be willing to pay for it. Now that’s my advice.
Now you’re gonna say, well, Ken, what do you do? I don’t do any of the three. I’ve been around it long enough and I love studying about these things and reading about them. And when I have questions, I have a couple Facebook groups that I’m a part of that actually have a bunch of financial advisors in them, and so I ask questions and pepper them with things.
In fact, I was asked, I guess two quick experiences. One, a situation came up where some people had some questions about social security. I’m like, hey, let’s figure out the answers. Let’s find it. So we helped him find the answers and get a great solution, and it was through this Facebook group.
The other experience I had just recently was somebody came up to me in church and said, hey, I understand you do finances. And I said, yeah, I do it in the business world. I’m not like a day-to-day financial planner. And they’re like, oh, I misunderstood. I said, but I’m around it. Like, if you have some stuff you want to talk about, well, I’m happy to shoot the breeze and talk about it.
And they proceeded to walk me through a conversation that they were having, and immediately I could tell that this was a commission-based advisor because of…they’re, like, well, they’re recommending we do this, and they do this, and they do this. And I said, oh, I bet it’s this product. And they said this, and I said this, and they’re like, yeah. And I said I bet they were really pushy toward that product and weren’t paying attention to any of the rest of your financial plan. Is that right? And they said, yeah, we couldn’t understand that, and that made us feel a little uncomfortable.
Guys, this is the world, and I wish that it was different. You need a comprehensive financial plan before you’re pushed into product. You need a comprehensive look. And again, coming back to me, how do I do this? I do it myself. I build my own plan. I have a Google Sheet that has I think 40 tabs in it now with all the different analysis and structure, investment portfolios, and legal elements, and everything. It’s a hobby. It’s just something I enjoy learning about and studying about, and I just look at myself as one big massive case study for how can I try to leverage and make the most out of the resources with which I’ve been blessed, and my family has been blessed.
So there it is. Commission or fee-based advisor? I say, don’t do either. Go find a relationship with somebody who will just…the only reason they will engage with you and you’re going to engage them is to build a comprehensive financial plan and then keep it updated for you at whatever intervals everybody agrees on.
And then my preference is, whatever the plan says, then you go and execute because they are online brokers and they can refer you to an attorney if you need a will. Like these basic elements that you can go and if you want to be that do-it-yourselfer, you go execute yourself. If not, now with that plan, you can go and find a fee-based advisor or listen to people talk about commissions, but you’ve got your plan, and you say, hey, whatever we’re doing here, it’s got to fit within this program and this plan. And if it’s not helping me get toward these objectives and goals, then it’s not gonna work or it’s not gonna fit.
So that’s my recommendation, primarily just because that’s the way I do it. And I’m not saying everybody has to do it the same way. I would just encourage you to think about that and figure out what’s best and right for your situation, and then go execute on it. But really, it’s getting that comprehensive financial plan, not being sold a product, not assets being gathered up by somebody who’s gonna earn this commission on it into perpetuity. Pay a one-time fee, get that plan done. And then pay as you go to keep it updated.
Many, many thanks to you for joining today. This is a wrap for Episode 98. Happy day.