Nowadays, financial advisors have many different platforms to choose from when managing their business. Some only charge commissions, while others charge a combination of fees and commissions. But now, many advisers now choose to abandon their broker-dealers altogether and charge only fees. Some companies still provide insurance and annuities on a commission basis, but other companies have even avoided this method and adopted a fee-only overall structure for all products and services they provide.
Fees and commissions
Compared with commission-based plans, fee-based plans can provide financial planners and clients with several key advantages. One of the most obvious benefits for customers is that they know exactly what they paid and received in exchange for their money.
Most fee-based consultants charge hourly fees or fixed fees for the services they provide. They have to try to find and read few or no fines in boring prospectuses or other sales materials, which may reveal a large amount of additional fees or fines that consultants might ignore when making a purchase.
Many registered investment advisors (RIA) also arrange their fees as a percentage of assets under management (AUM), which directly aligns their financial interests with their clients, because their percentage will increase proportionally with the growth of client funds Increase. Advisors engaged in commission work often face the temptation to over-trading client accounts to generate sufficient income.
Regardless of the fee structure, RIAs usually get paid for the services they provide, so they are also more inclined to provide customers with additional services, such as comprehensive financial planning and social security analysis.
Many commission-based planners are reluctant to provide this non-transactional service because they cannot directly bring them any income. Customers can also more easily know that RIA adheres to strict fiduciary standards, which require them to unconditionally put the interests of their clients above their own interests, regardless of all other factors.
Even though RIA also provides insurance and annuities in the form of commissions, this high standard must be adhered to when using these products. Planners who only charge commissions must meet a much lower applicability standard, which only checks the applicability of a particular product or investment to the customer on an individual transaction basis.
In addition, the media has enthusiastically promoted fee-only consultants to the public in the past few years, touting them as a safe haven for uneducated consumers who do not want to fall prey to unscrupulous and predatory salespeople.
The fee structure can usually also provide customers with additional tax incentives, because any expenses they pay out of their pockets can be listed as the miscellaneous investment expenses in Schedule A that can be itemized. Commissions are used to reduce the cost basis of capital gains, but they cannot be listed separately in Form 1040.
It should be noted that sometimes investors actually realize more savings from commission costs than they pay at their own expense, depending on the type of account used, the number of transactions executed, the amount of income realized, and the investor’s tax rate.
When it comes to complying with regulatory agencies, RIAs are also generally easier. The Financial Industry Regulatory Authority (FINRA) requires the compliance department of broker-dealers to closely monitor those registered representatives who have original records, just as closely as those who have an impressive disciplinary history for countless violations.
However, according to trust regulations, this type of treason is more difficult to get rid of, and those who try to do so will soon have their RIA license revoked. RIAs also make it easier to obtain approval for sales and marketing materials, and generally enjoy greater freedom in the content that is allowed to be presented. RIA models also often have greater bureaucratic simplicity, which allows planners to spend more time developing their business and serving customers.
As millennials start to finish their studies and start looking for jobs, it is clear that they want different types of financial services from planners and are more willing to accept the fee structure than their parents.
Older investors who have been paying commissions may be satisfied with this arrangement, but as the younger generation begins to crowd out the elders in the modern workforce, this traditional form of business may be greatly reduced in the coming years.
Consulting companies that charge only fees (even if they also provide insurance and annuities) are logically easier to buy and sell than companies affiliated with broker-dealers. Compared with broker-dealers, RIA companies can transfer customer accounts and rebrand faster, and there are far fewer legal and company disputes. In turn, this advantage makes RIA companies more attractive to potential buyers, who may be willing to pay higher prices for them.
Although they do not resort to broker-dealers when operating their business, fee-based consultants do not have to act alone. The National Association of Personal Financial Advisors (NAPFA) was established in 1983 to provide professional support to fee-paying groups. The organization requires its members to abide by specific ethical codes and take an annual fiduciary oath to reflect their commitment to the practice of disclosing conflicts of interest, providing appropriate written disclosures, and of course, adopting a fee-based compensation structure.
NAPFA also provides its members with networking and marketing support, continuing education and professional development opportunities, as well as an annual conference where members can exchange ideas and learn about new products and services and industry innovations. Customers looking for a fee-only method of planning can also find member planners in their area on the organization’s website.
Although the sales of commission-based financial products will not disappear soon, fee-based consultants are expanding their share in the financial market and continue to shine in the competition for new customers. Consultants who want to learn more about the advantages of being an RIA and only charging customers should visit NAPFA’s website.