Do you understand exactly how your financial advisor is paid? Knowing how your financial advisor gets compensated is an important element of the client/advisor relationship. It brings clarity and transparency regarding how the compensation works and how it impacts your advisor’s motivation—particularly if there are conflicts of interest. There are three types of payment structures used to compensate financial advisors: commission-based, fee-based, and fee-only which is what Williams Financial uses. This compensation arrangement positions Williams Financial to be a fiduciary 100% of the time.
Commission-based
A commission-based model involves paying a commission on the backend based on a product that the advisor sells to the client. For example, the advisor may sell the client a mutual fund or an insurance policy and then get paid a commission based on the amount of the sale.
In this dynamic, many feel there is an inherent conflict of interest because the advisor may be, understandably, focusing on pushing a product instead of providing sound financial advice to clients. That can make it difficult for an advisor and a client to have a trusting, mutually beneficial relationship.
Fee-based
In a fee-based payment system, the advisor charges a flat fee or a percentage of assets to advise the client. However, with this arrangement, the advisor can also sell products to the client based on the financial advice provided. In this situation, the advisor also gets paid a commission on many products that are sold to the client.
For instance, the advisor may collect a commission if the client opts for a mutual fund. Similar to a commission-based system, a fee-based dynamic can also create a conflict of interest. When assuming a fiduciary role, the advisor should only guide the client, not be selling a product. Sometimes, however, the advisor wears both fiduciary and non-fiduciary hats simultaneously in a fee-based arrangement which can create a conflict of interest.
Fee-only
Only around 4% of financial advisors in the United States use a true fee-only model, which is the payment structure Williams Financial uses. This is when an advisor makes money based on only the assets under management (AUM) or a flat fee. Charging a flat fee can be problematic because the amount charged has to be reevaluated for each client every year. Therefore, many fee-only advisors stick to a percentage of AUM.
A fee-only payment arrangement is seen by many as both fair to the client but also a helpful motivator for the advisor. As the advisor provides solid advice to the client, the value of the assets under management rises, specifically because the client is making money from the advisor’s good advice. As a result, the better the advice, the more money the advisor makes.
On the other hand, using either of the first two methods may involve selling products to the client, and, in either case, this can present a problematic conflict of interest. But a true fee-only payment system, whether the advisor charges based on a flat annual rate or the AUM, the advisor is only rewarded when the client makes money.
With a fee-only payment arrangement, your financial advisor is free to be a genuine fiduciary 100% of the time. On the other hand, with a fee-based or commission-based payment system, your advisor has to wear multiple hats, including being a salesperson looking to make a profit off the products they sell you. The conflict of interest inherent in fee- and commission-based payment systems makes a fee-only arrangement a better option for clients who want an advisor who’s always on their side.
Williams Financial is here to work in the best interest of our clients. With Williams Financial, you can reap the benefits of a true fee-only model. This means our advisors are always motivated to help you build your wealth—both because we enjoy helping people reach their goals and because it’s mutually beneficial for both parties. You’ll never feel like a product is being forced on you. You just get reliable, actionable advice. To learn more, connect with Williams Financial today.