How does my financial advisor make money?

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A simple guide:

I started my career as a stockbroker (my card said “financial advisor”) at one of the largest Wall Street brokerage firms. I can’t count how many times clients and prospective clients asked me, “How do financial advisors get paid?” It’s a perpetual source of confusion.

At the risk of putting them to sleep, I would at least attempt to explain our 21-page Financial Advisor Compensation Plan. The result? My clients told me they greatly appreciated my attempt to provide transparency in an extremely nontransparent business. My clients trusted me and that was the most important thing to me. However, I also suspected my long-story explanation wasn’t making sense to them and they were always a little skeptical of the firm.

The financial universe has gotten only more complicated since then, so misunderstandings over how brokers get paid persist. Let’s cut through the confusion: There are only three ways that brokers or financial advisors get paid for their advice.

Commissions: When a broker whose working on commission basis recommends a certain fund, annuity or any other investment product, there’s a sales charge that comes right out of your pocket (a sales load, which can run 3-6% of your investment right off the top). Or sometimes the company whose product he or she is recommending pays the broker’s commission as a ‘marketing expense’ for that company. Think of it as a kick-back.

Either way, commissions create a conflict of interest for the advisor. Why? This broker or advisor has a big incentive to recommend the option that pays him/her the most whether or not those investments are really best for you, the client. Incentives are fine but we’re talking about investments, not hamburgers or used cars. Now you can now see why stockbrokers at most of the traditional brokerage firms are criticized for being nothing more than high-paid salespeople.

This is why if you do use a commission-based financial advisor, you’ll want hire one that is legally bound to put your interests first, above their own. This is known as an investment fiduciary.  

Ok so how do I get away from this Wall Street driven sales culture and get a fair deal?

Fee-Only: By far the most touted by the media and talking heads (like me) is the fee-only model. Fee-only registered investment advisors (RIAs) don’t sell products, don’t accept commissions and they operate as fiduciaries.

To hold yourself out as a fee-only advisor, you cannot also sell life insurance, annuities or any other investment for commission. Fee-only advisors work for their clients and ONLY get paid an hourly rate, a fixed annual retainer or a percentage of the investment assets they manage for their clients. The advice they give is independent of the products recommended.

Fee ranges are all over the map, but generally average somewhere between 1-2% of the total value of the investments being managed. Say you have a $500,000 portfolio that you manage with the help of a fee-based (that is, asset-based) adviser charging 1% of your portfolio’s value each year. In that case, you’re paying $5,000 a year for that guidance.

To determine if the service is worth the fee, you need to explore what value you’re receiving in return. If the portfolio is closely mimicking the overall market it may not be worth paying a manager even 1%.

But if this advisor generates stable, reasonable returns regardless of the market gyrations and keeps you from going off the rails whenever there’s market drama, or taking too much risk unknowingly, then a fee of up to 1.5% may be well deserved. If there’s a downside to fee-based management it’s that even when the overall market has a terrible year, your investment advisor still gets paid, so it’s important to hire someone who has expertise in both up and down cycles.

Fee-Based: Fee-based advisors blend the commission-only and fee-only models.  They can sell you an investment and get a commission from that transaction, or they may charge you a fee calculated as a percentage of assets to manage your portfolio, or they may do both.

While the term “fee-based” may sound very similar to “fee-only,” there are key distinctions. The fee-based model can be vulnerable to the same conflicts of interest that the commission structure entails. I know lots of really qualified advisors who are mainly fee-based (the majority of their revenues come from fees), but they can offer you a mutual fund or an investment that normally comes with a commission. For example, an advisor might really believe strongly in a fund family that has a sales commission or ‘load’ built in, but I’ve even seen cases where the advisor will make sure that cost does not come out of your pocket.

Whichever way you compensate your advisor, just make sure you get it down in the form of a simple, clear written statement. I always say, from my days as a broker, the thicker the documentation that explains an advisor’s compensation, the more you’ll pay for that advice.


 

Pam Krueger is the founder of WealthRamp, co-host of MoneyTrack on PBS and national spokesperson for The Institute for the Fiduciary Standard.

47 Comments

  1. FJ says:

    Thank you for the great information that I was looking for many years. Many people, even my close friends and family members, are paying high fee for poor financial advice. They would have better off if they have invested their hard earned money into a low fee index fund.

    I think fee-only advisors are worth consider instead of other two, or learn about finance 101 and invest in dividend growth stocks as I do.

    Best Regards,

    • Elliott says:

      Hi Pam,

      I think I have been reading your post at least two times a day for the past week because I am graduating college in a couple weeks and I am really trying to narrow down my choices for my career path. I have been in the financial services industry as a personal banker for about 4 years and I am graduating with my bachelors in finance in 2 weeks. I have been stuck between choosing to be an investment banker or a financial advisor. I have done pros and cons for both sides and the one thing that I had as a con for financial advisor was being able to find a way to give great investment advice without looking like a simple sales person, and also finding the correct path of how to charge for my services. The uncertainty is what haves me uneasy, but I would really like to talk to someone in the industry. Would you have any advice for me that may guide me in the right direction?

      Thank you.

      • Pam Krueger says:

        Hi Elliott,

        You might want to study for your CFP, and at the same time consider doing an internship at an independent firm that follows the fiduciary standard. There, you will not be playing the role of salesperson. All advisory firms have to go out and cultivate clients, but the difference here is working for a firm that works for the client or accepting a job as a series 7 sales man. That’s what I did straight out of college and it was an eye popping experience. I was so excited and so flattered to have been recruited by a major brokerage firm. Within 6 months, I called my parents and told them I’d been hired as a telemarketer and it was sleazy business! I was 24 yrs. old, not old enough to rent a car but somehow old enough to tell 65 year olds on the brink of retirement how they should be investing in annuities. Yick. Anyway, I left and found out there are advisors who don’t work for brokerage firms selling products but actually offer real advice.

        Elliott, feel free to give me a call and let’s chat about some potential ideas. I’ll be happy to answer any questions that might help you get on the right path. It’s a fantastic career and when you work with the right people, you’ll probably thrive. My cell is: 415.378.8240.

  2. Interesting that you do not mention that investors can do their own stock choosing, buying and selling without involving a third party. With all the research and stock management tools available I am having a hard time understanding what financial advisers can do that I can not do myself. I know they would not spend as much time carefully choosing investments and monitoring them. I think it is that most people think investment advisers are some how have access to some kind of magic that consumers don’t – they don’t. Perhaps they want to have someone to blame for their poor decisions.

    • Pam Krueger says:

      Hi Ian,

      Thanks for making this great point. I couldn’t agree more. The reality is, most people now know they can make and manage their own investments, and there are plenty of free tools that are incredibly useful. A really good, and qualified fiduciary financial advisor will not focus only on investing. He or she will start with the financial planning. This is where the collaboration comes in when you sit down with someone who will take the time to understand your whole financial picture, and then model out cash flow and spending scenarios. This planning should come before any investments. It’s like going to a doctor who instead of taking the time to learn about you, and why you’re there, he goes straight to selling you on prescription drugs. A really good advisor is not going to ‘sell’ you on his magical investing strategies, or his firm’s chosen funds– he will start with the planning process first.

    • jack herrmann says:

      Not everybody has time to invest themselves. That is why FAs were created, they also manage much more then just stocks, they have control over all of your finances and can save you thousands of hours of work.

  3. Richard Cobb says:

    Thank you for sharing. Great content.

  4. Heide says:

    I’ve been thinking about this conundrum for some time. Why is it that investors only have the option of doing it themselves or using an advisor who charges year round fees for periodic advice? Rarely if ever do you see an investment advisor charge you only for the work they do for you. I’m seeking to change this.

    • Pam Krueger says:

      Hi Heide,

      Many advisors care take their clients’ portfolios by making sure they are properly diversified and in balance. Most are monitoring and making sure details are constantly in check. For example to ensure that withdrawals you’re taking from various retirement accounts are in sync with your goals and not overspending. The relationship includes the get-together meetings that only happen a few times a year or less, but there’s a lot to making sure on the back end that you’re in good shape with taxes, estate plans, etc. Reach out if you want any help in figuring out whether you should work with a planner by the hour, retainer or pay an inclusive assets under management fee. As long as the fee is reasonable, transaction costs are kept to a minimum, I have no problem paying someone to manage my portfolio. I also take full advantage of the education a really good advisor will provide. Thanks for your good comments! Cheers, Pam

  5. Elaine says:

    My scotiabank advisor keeps bugging me to rebalance my portfolio . It now suggests a quarterly rebalancing. I have never automatically rebalanced and the returns are fantastic
    Is he just trying to get more commissions on buying/selling changing it up and my gains will be eaten up in transaction trade fees?

    Elaine

    • Pam Krueger says:

      Hi Elaine,

      I’m not a fan of any bank managing my investments because costs there tend to be buried deep within the actual investment products, the investments are very limited to whatever they want to ‘sell’ you, and over the course of time we tend to simply sit back and forget to check in. That’s when you realize, it’s been 15 years and I’ve paid HOW much in fees?? Holy cow. I mean it can add up to tens of thousands easily. Banks and insurance companies are just notorious for underperforming and over charging for what they offer. Email me separately and I can suggest some other very high quality, very cost-efficient ways to accomplish what you need/want. My direct email is pam@wealthramp.com. I ‘ll see your email and get back to you within a couple of days. 🙂

      Once upon a time, we didn’t have as many choices. There are just so many better options these days.

      Warm regards,
      Pam

      • peter says:

        One thing that intrigues me is if and how fuduciary agents get some kind of compensation for sales of annuities and individually mamanged funds. The IMF’s appear to add a level of management fees that get charged and a re invisble to the investor (advisor client). For annuities, I ssupect thata slaes commision that appears nowhere is received by the fuduciary agent and that is covered by the fee chaged for early withdrawal. None of the above have been disclosed by my agent. Am I right in my assumptions?

        • Pam Krueger says:

          Hi Peter,

          I often wonder how we wound up creating such a stupid, confusing financial services world. A true “Fiduciary” is not an agent because agents work FOR their companies, not FOR their clients. So anything any broker or agent tells you about fees comes from the mouth of the mothership– aka the insurance company or brokerage firm because that’s how an agent is paid. When you’re working with a real fiduciary advisor, that advisor is legally obligated to put aside any other incentives and work only and directly for you. That means you’re paying the advisor yourself and your advisor must disclose all fees and break them down to explain them, etc. No system will be perfect, but I suggest not wasting your time trying to figure out the puzzling array of tricky hidden sales commissions built into the IMF’s and yes, annuities are NOT an investment. Annuities are just one TOOL you would only touch if you absolutely needed it. For real investment advice, avoid big box insurance companies or so-called, full service brokers. Instead, find an independent registered investment advisor who is a true LEGAL fiduciary. I’ll match you to the right kind of fiduciary advisor on Wealthramp.com. That’s my platform where I introduce consumers to fiduciaries who fit with your preferences. Let me know how you do!! Warm regards, Pam

  6. Melissa W. says:

    I’m newly divorced and have money coming from 3 QDRO’s as well the sale of my home. One of the QDRO is with Fidelity so I thought I would consolidate them all with Fidelity investments. I met with a Fidelity financial advisor today who asked lots of good questions and of course he wants me to place my money with them. As we finished up our meeting he explained there will be a yearly fee of .83% for my total investments. That sounds like a lot of money! I was a stay at home mom for 17 years and my ex husband did all this. I’m so confused … should I put all my assets at Fidelity or hire a fiduciary to help me figure this all out?

    • Pam Krueger says:

      Hi Melissa,

      You’ve been through a lot and believe or not, what you are doing right now is smarter than 95% of people in your situation. You can do both these things, and your gut it guiding you in the right direction. Step 1) get the funds safely tucked away in a totally liquid money market account. Fidelity is just fine, but do not actively ‘invest’ the money anywhere until you have a total, holistic plan. So you do not need anyone working at Fidelity to give you investment advice. Just a simple parking place that will keep this money safe and totally available to you. Interest on this will be minimal, but it’s all about safety first. Do that, then breath out. 🙂 Step 2). Now you can turn your attention to putting a totally holistic plan in place. I would definitely want to suggest a fiduciary advisor who has deep knowledge and experience of financial planning and investment management for your specific situation. I’m heading to California tomorrow afternoon, but I’m available in the morning (EST), or on Tuesday, and anytime after T-Day. Why don’t we try to chat so I can explain a few things, and assure you how correct you are in your approach. You haven’t taken any wrong steps here, so you’re fine. Call me on my cell: 415.378.8240. It won’t take much to get you feeling confident because you’re already doing the right things– don’t worry, you’ve got this, Melissa! I look forward to talking, and meantime, wishing you a relaxing holiday.
      Pam

  7. Ashton A. says:

    I’m currently 16 years old and have been looking at many different career options. I’m currently in my 2nd of 7 weeks at Dave Ramsey’s Financial Peace University and the Instructor of our course is a Financial Advisor at SunTrust. His job has interested me in finding out more information, but I would like to know out more about how I could help people with Financial Planning to get out of Debt and help with behavioral changes, impulse spending, and investing (Especially Roth IRAs).

    From what I have seen on Google so far, it is mainly Sales, but was wondering how I would be able to grow an independent “Business” with those incentives listed above and putting the customer before me, not just shamelessly selling someone a product I don’t know about.

    If I were to go on my own, I’d like to be a Financial Planner, not as much of a Broker. I’ve looked at the options an Advisor could be paid by, and Fee-Only seems to be the most appealing. Would that differ for being a Planner?

    Lastly, what Degree would I need to be a Financial Planner that is a Fiduciary (works in the customers best interest) and what are some good colleges you would recommend.

    Thanks,
    Ashton

    • Pam Krueger says:

      Ashton,

      You’re incredible! You’ll be so far ahead of the curve by educating yourself and you have so many options available to you within the financial advisory world. You’ve already picked up on the difference between someone who works as a salesman, or ‘broker.’ Getting familiar with the role of a financial planner, and how that planning process works dynamically over the course of someone’s life. Bothering to become a fiduciary advisor who is registered with the SEC means you’re serious about your expertise.

      You may decide both planning and investment / portfolio management is most appealing to you. I have an idea: aside from you doing your own homework, which clearly you are, how about if I set up a phone call with an excellent advisor who has CFP, CFA and you can interview him/her?

      That way, we can learn more about you, talk about which courses and or degree might be most suitable, and how explain how the CFP course works in the real world?

      Ashton, I’ll be excited to get you on the phone or Skype with a top-notch RIA and who knows??? Maybe we’ll get you an internship when you’re ready!

      Please let me know when we can chat, my cell is below and it will be my pleasure to make a good introduction for you.

      Warm regards,
      Pam
      415.378.8240

  8. Katrina says:

    Hi Pam,
    I am looking for a Financial Planner and wondered if you have any suggestions ? I have Fidelity investments through work but am playing catchup post divorce. At 61 in good health and need to make some other investment decisions. Got called by an NY Life contact out of the blue and have paperwork from an investment group my parents use for a 1% fee. I have not felt comfortable to make any decisions and wanted to reach out.

    • Pam Krueger says:

      Hi Katrina,

      NOOOOOOOO NY Life! Why can’t the insurance agents just be insurance agents (salespeople). Let the real advisors (who bother to take the time and care to be fiduciaries) be the advice givers? 🙂

      Yes, I can definitely help you find a truly qualified financial planner. Let’s start by you going to my site, Wealthramp.com. Click the ‘get matched’ and go through the questions. Then, when you’re done and you see the advisors who fit with your priorities, retirement planning, retirement income planning, retirement spending… etc., then let’s talk so I can answer any questions you have.

      This is a 2-min video about how I vet advisors. https://wealthramp.com/about-us

      Katrina, here’s my cell: 415.378.8240. Please just know I’m here and we can chat so you feel comfortable.

      Warm regards,

      Pam

  9. Sue says:

    My husband is retired and is considering Amnex Wealth Management invest his $400000. 401k with TD Ameritrade. Should he be looking at other options?

    • Pam Krueger says:

      Hi Sue,

      I don’t know the firm personally. Thanks for sending my your question— let me take a look at their background records first. That will tell me a lot. Then we can hop on a call together, and I’ll show you exactly what I see, good, bad or ugly. At first glance, they appear to be hybrids, meaning they make their money from fees, but also from commissions from selling products. This isn’t a model I particularly like but let’s look more closely.

      Give me a call tomorrow afternoon. My cell is below. It will be pleasure to chat it through with you.

      P.S. TD is a great place to ‘custodian’ the account. Fees are super low and they’re probably my favorite in that discount broker category. But in the advice dept., there’s nothing there so it’s good you’re being really thoughtful.

      Warm regards,

      Pam
      415.378.8240

  10. Margie says:

    Hi Pam,
    I’m in my mid thirties and just started working for the State of WI. The state has a deferred compensation plan which is pre-tax. They work with financial advisors who charge a fee of 0.45%, which is the lowest I’ve seen. When I asked whether she’s fiduciary, she said that the board is fiduciary. I’m not sure what that means. Meanwhile, the man who sold us our life insurance said we should avoid using the deferred comp plan because it doesn’t offer many choices for investments. On other other hand, our current “financial advisor” told us he would help more with budgeting and goals for a fee of $500 per year, and he currently receives approx. .75% upfront from the mutual fund company that he uses to invest with, plus .75% annually as a trailer. My question is, should we use the deferred comp. plan and the advisors for that plan?

    • Pam Krueger says:

      Hi Margie,

      Yes, I can see where it gets confusing. First off, let’s just make life easier by ruling out the insurance agent who’s trying to ‘advise’ you because he’s not an advisor, he’s a salesman.

      Next, now you can focus only on working with a real advisor or planner. The question is who? So starting with the workplace environment. Yes, the plan itself has only X number of investment options. Think: chocolate, vanilla and strawberry in terms of variety. Stocks, bonds and cash-like money market funds. That’s what they mean by limited choices. BUT, those choices are pretty well thought out and selected by an investment committee. The fees are very low. So there’s not much to do there except get familiar with the choices and diversify within those options and for that kind of ‘advice’ or guidance all you need is a relationship with this advisor. So that’s the ‘workplace’ portfolio. What about outside of work? Outside the plan? What’s happening with your other savings and investments if you own other investments from say, IRA accounts or real estate investments? That’s where you may want to engage with a real fiduciary financial planner who will not only look at your workplace plan, but will look at your whole picture. I don’t like the fee and trailer for this advisor who’s offering the $500 PLUS .75% a year??? That’s way out of line in terms of fees. (Unless I’m missing something else he said.) Please know you can call me to have a chat, or if you go to my fiduciary matching site, Wealthramp.com you’ll fill out the questions and then get matched to a planner I’ve already vetted. I’m here and happy to help so please don’t hesitate to call. Here’s my cell: 415.378.8240.

      Thanks,
      Margie!

      Pam

  11. Vicki says:

    Hi Pam. My seven siblings I inherited some money when my dad passed away a little over a year ago. His money was with Edward Jones. It appeared that Edward Jones had done a good job for my dad. Edward Jones opened a new account for each of us and transferred equal shares into our new accounts. Some of us left it there and others moved it elsewhere. I often hear bad things about Edward Jones and how they conduct transactions that benefits the client but benefits the broker far more. I’m 61 years old and will retire in just a few years. I will need that money to live on, along with my social security. Should I be concerned about Edward Jones or do you believe it’s an adequate place for my inheritance?

    I appreciate your response.

    Vicki

    • Pam Krueger says:

      Hi Vicki,

      I’m sorry you lost your dad. This money is important. I’m not a fan of brokers or insurance agents taking on the role of ‘financial advisor’ because an advisor does so much more than sell investments. Your dad may have had a good relationship with the individual broker (advisor) there. You may not have that connection, and therefore, you’re asking the smartest questions right now.

      Let’s divide the investment advisor world into two distinct groups. There are ‘brokerage firm advisors’ and there are ‘fiduciary financial advisors’. The brokers are salespeople. They get paid to sell you transactions. The bigger the transaction, the more money they make whether or not you do well. That should make you wonder if his investment advice is motivated by how much he’ll make based on what you do. That’s a built-in conflict of interest and there are no brokerage firm advisors allowed to sign a fiduciary oath for that reason. You may never know how much you’re really overpaying them because they bury the fees inside the investment products. 90% of financial advisors work at either a brokerage firm or an insurance company. They represent those interests, not your’s.

      Let’s focus now on the other group– the fiduciary advisors who don’t work at brokerage firms but are independent registered investment advisors. There are only about 50-thousand independent financial advisors so they are much harder to find because they don’t advertise like Merril Lynch or Edward Jones. These advisors are registered with the SEC and by law, they must put your financial best interest first. They do not work for anyone but you and they must be 100% transparent about their fees. The fact that work only and directly for you means you’re on the same side. Registered investment advisors take a different approach from the get-go. They tend to start with a very thorough analysis of where you stand, cash flow, etc., so their investment advice is based on a foundation, not some out of context investment idea. Still, being a fiduciary doesn’t make an advisor competent. The independent financial advisor in the strip mall down the street may not be anywhere near as educated or experienced as another independent registered advisor in a nearby town. How the heck do you vet these advisors?

      There are some simple steps you can to screen an advisor. I’ll give you 3 here:

      1. Go to the SEC’s site https://www.adviserinfo.sec.gov where you enter the name of firm or advisor and look to make sure there are no ‘disclosures’ or complaints, you’ll be able to see how much they charge in fees, you’ll see their education, their time in the business, credentials. You’ll get a really good sense of who they really are. The info’s all their on their form ADV.

      2. Then ask if the advisor is fee-only. You want an advisor who gets 95% of his revenue from the fees you pay him directly, not from third-party kickbacks.

      3. Ask the advisor if he or she is willing to sign a fiduciary oath.

      Vicki, I created Wealthramp.com to match you to the right fiduciary financial advisor. I vet each and every advisor on my platform and I screen out 95% of advisors and there are no brokers or insurance agents on Wealthramp because they can’t be fiduciaries. I’m on a mission to educate people about the fact that advisors play by different rules.

      This money you’ve been fortunate enough to inherit is important and the person you turn to for help needs to be competent and work for you, as your advocate, not for some brokerage firm. I’m totally available to chat, and I’d love to see you go to Wealthramp.com and get your matches, then we can run through their profiles.

      My cell is: 415.378.8240.

      Warm regards,
      Pam

  12. Kathy says:

    I have a feeling I’m being ripped off by my broker. Is there a certain form I should ask him for to find out exactly how much of my money he has taken in fees?

    • Pam Krueger says:

      Hi Kathy,

      If you are dealing with a broker at one of the major firms like Ameriprise, or UBS, Morgan Stanley, there’s nothing you can ask for that will assure you that person is truly not motivated to ‘sell’ you investments. It’s a little like asking the used car salesman to ‘pinky swear’ he really is giving you a great deal. At the core of the broker relationship is the underlying business model that compensates brokers as sales people. I used to do this for a living myself years ago. Some brokers are always looking out for clients, but you’ll never really know which one’s because the business itself is set up to make money by making sure you buy or sell one of their favorite investments which in turn, generates commission income back to them. These commissions are almost always much higher than simply paying an independent, unbiased financial advisor a fee for their investment advice and financial planning.

      Brokers and their firms have no legal obligation to put your interests ahead of their own. Brokers, brokerage firms and insurance companies cannot sign a fiduciary oath. That’s what the fiduciary rule was aiming to change, and now that rule may never be fully implemented. But the truth is, you don’t need a rule. You need to be educated about the fiduciary standard. Registered investment advisors who are not working for brokerage firms or insurance companies and not tied to commissions are not in the role of the salesman. They are the real financial advisors and they are registered with the SEC which does hold them to the higher fiduciary standard, and as such, they will be happy to put it in writing.

      There are two very different standards advisors adhere to: the lower brokerage firm standard that defends the broker’s sales practices and only requires a broker sells you investments that are deemed ‘suitable’ for you. The much higher fiduciary standard requires the financial advisor put your interests first, ahead of the firm’s.

      An independent financial advisor works only and directly for you– not some other third party. This is why only an independent registered investment advisor will be willing to sign a fiduciary oath which is his written promise to put your interests first, otherwise, legally you can sue him. Okay, no one wants to take an advisor to court but you can’t even sue a broker or brokerage firm for making money-losing recommendations, but the reality is you sign off your rights to sue the moment you open the account there.

      Fiduciary advisors are willing to take the oath and they know you can sue them later if something goes wrong. The challenge is finding the right fiduciary financial advisor because not only do they need to be willing to sign the oath, they need to be competent! And they need to have the right kind of expertise for you. What if your’re a mom with a special needs child? You have to make sure the financial advice you get is coming from someone who has deep knowledge and expertise in special needs trusts and planning and will not be motivated to sell you insurances you don’t need.

      A real advisor (fiduciary) is likely to have real financial planning skills. Most brokers wouldn’t know how to do a real cash flow analysis because that’s not what they’re paid to do. I was never trained in how to create a roadmap for someone who’s just stepping over the starting line of retirement, but somehow, brokerage firms advertise how competent their ‘advisors’ are at doing just that. When did brokers become ‘financial advisors’ anyway?

      On Wealthramp, I’m vetting each and every fiduciary advisor and interviewing each before I allow them or invite them to participate on Wealthramp.This vetting process is why it’s taking me two years to completely populate my platform. I have to be thoughtful about each and every advisor. Then I match you to the best-fit advisors who fit your specific priorities.

      I’m sure I’ve ‘over’ answered your question but this has become the challenge I’ve chosen to take on to help people figure out who’s the best possible expert to help plan and manage their finances. Let’s let the brokers do what they do best– sell. Let’s let the real financial advisors do their real work. I hope this helps.

  13. Venkat says:

    Hi Pam,

    Thank you for your clarifications above.
    I’m a stock market investor for about 8yrs now and I’m planning to monetize my stock investment skills. I’m looking for your help and suggestion on what are my options to not only earn for myself(which has been for last >8yrs) but provide guidance or manage other peoples money and thus earn income out of it. Equities are my passion though I’m from IT background. What are the qualification or legal requirements I should have in starting such business? Is fiduciary RIA a best option? I do not want to work for any other company but want to start my own.
    Thanks in advance for your help/reply.

  14. Cory says:

    Pam,

    Wow! What a great service you are providing people. I just read through all of the comments above and I am enlightened and impressed with the questions that were asked and the answers that were given. I have been looking into becoming a financial advisor for several months now. I first got in contact with Prudential Financial Advisors and then after learning that they didn’t even require a series 7, I started talking with Edward Jones who claim they have great training and education. But after reading some of the comments above, I myself have now started to realize the difference between a true RIA fiduciary and the so-called advisors (or salesmen) from insurance and brokerage companies. So, my question is, how do I become an independent fiduciary registered investment advisor and skip working under an insurance or brokerage firm? Because, I have heard before that you have to work under one of those companies for about 2 years before going independent. Is this true? Or is it possible for someone with no experience to get the required training (series 7, 66 maybe CFP etc) on their own and then go into business right away for themselves as a fee only independent fiduciary RIA?

    • Pam Krueger says:

      Hi Cory,

      This is an excellent question. While the series 7 / sales route is going to give you a good crash course in stocks, bonds, mutual funds and it really is a rigorous test, it’s just a starting point for a sales position at a brokerage firm. Sounds like your objective is to become a real investment advisor. You do not need to go the sales route first. At all. My advice is identify a few excellent registered investment advisory firms in your area. Talk to them and ask if they would have any opportunities. You’ll want to complete the CFP course work and get those requirements fulfilled while at the same time, you can pick some practical hands-on knowledge in a support role at an independent RIA or you could even start out at a company like Vanguard where you’ll be exposed to lots of different tasks. I know this will feel like an internship more than a role as advisor, but it serve as the foundation as you move forward. The CFP education route offers some different paths to go about becoming certified. The exam itself is pretty rigorous and takes several hours to complete because it is comprehensive. Check out CFP.net for details if you haven’t already. My first stop would be checking out RIA’s in the local area and look closely at their SEC records– but before you get too excited, first look for red flags such as disclosures and make sure they are not selling other products or also licensed as brokers. Choose carefully, because you want to avoid associating with any firms that are not fully fiduciary. Then approach the firm and just ask if there are any potential internships. Cory, I love hearing you want to get into this business. If you need/want my help in learning your way around an ADV (pts 1 &2), just let me know.

      Good luck and keep me posted on how you do!

  15. Brina Rosner says:

    Do you happen to know of a highly competent flat fee (fiduciary fueled) advisor you can recommend in the miami/coral gables area? The Wealthramp site appears to be under construction and would l would love to meet with someone local to review and potentially take over our accounts. I am seeing a ton of potentially unwarranted fees via financial statements and a prospectus just received in the mail 🙁 Thank you 🙂 🙂

    • Pam Krueger says:

      Hi Brina,

      I’m happy to help–yes I’m spending most of my time vetting fiduciary advisors because not only do they need to be fiduciary, fee-only, they should also be competent!

      If you can let’s do two things: 1). Go to Wealthramp.com and get matched. Then let’s see which advisors you match. (We were doing updates and off for about a hour yesterday) but all good now. 2). Let’s schedule a call after you go through and we together run through the advisor profiles.

      I’m here! Looking forward to meeting you. Thanks, Brian. Pam 415.378.8240

  16. Patricia Szymczak says:

    Hi Pam,

    I am so happy that I came across this article on the web -it’s exactly what I have been looking for! I have also been perplexed by the many people that don’t even realize how much money they are paying their financial advisors! I have no problem paying for this service, but once everything is set up, they don’t do anything – sheesh! I just went on Wealthramp and competed the information, and was wondering if you could check out the people that are recommended for me. I am close to retirement and haven’t met with anyone yet (thank goodness!).

    Thank you for your help and guidance.

    • Pam Krueger says:

      Hi Patricia,

      You’re instincts are excellent. Feel free to call me and we can chat through the profiles. I’m available this afternoon at 4pm ET, in case you get this in time, and/or my email is: pam@wealthramp.com. We can go through each background and compare. 🙂

      Thanks!
      Pam

  17. Martha Bigham says:

    I am 73 and retired I have a variable annuity with Nationwide life and some investments with Edward Jones. The financial advisor convinced me to move the annuity to Edward Jones he said that way he can make sure the RMD is correct he claims I am not paying a fee to Edward Jones I want to make sure I am not paying fees to Edward Jones and nationwide I get a quarterly statement from both. I can’t get a straight answer from either one. Why can I ask what I paid last year in fees and get an answer??

    • Pam Krueger says:

      Hi Martha,

      You deserve nothing less than a straight answer. You should also be able to easily compare fees among different brokerage firms, and you should be entitled to full transparency. But the law doesn’t require full transparency from brokers or insurance salespeople. This is why I strongly urge consumers to completely avoid making investments or getting ‘advice’ from them. Only advisors who are registered independent investment advisors are held to the much stricter fiduciary standard which means they must, by law, disclose all fees and expenses.

      Meantime, what can you do to get a clear answer from either the broker or insurance company that ‘sold’ you this annuity? You have made me realize that since there will likely be no fiduciary rule requiring full transparency from brokers and insurance agents, how can consumers force them to disclose all fees? In other words, what happens if you ask (or demand) that in writing, your broker account for all fees and expenses related to the investment you’ve made and explain those fees in clear language. Not all annuities have the same expenses of course. I’m including all fees– commissions that are built-into the policy, the annual expenses, surrender charges, account maintenance fees….everything. That’s what a real advisor would do– meaning a financial advisor who truly does act as a fiduciary. (Though you won’t find many who would recommend a variable annuity in the first place.)

      I just had a conversation about your question with a securities regulator at FINRA (they regulate brokers), and another asking this same question from SEC.

      Here’s what FINRA told me: Have I been to their website? Did the broker not provide a statement to the client? There ‘should’ be information there that will help answer this question.

      Here’s what SEC told me: There are certain ‘disclosures’ brokers are required to make. Then I was told they would need to check on it and get back to me. I received a call back where they referred me to their website.

      Have you seen that TV commercial where the little girl’s selling lemonade and she starts rattling off all these fees that explain why the lemonade is so much more expensive than the sign advertises? That’s is what’s happening here. During my frustrating call where we played the game of avoiding the question, he did admit that especially in light of all the new discussions around the fiduciary standard, it’s unclear to the public (apparently also unclear to the SEC), whether the client can make this demand and exactly what a broker must provide. Really? And this isn’t a glass of lemonade. It’s your life savings.

      Please stay tuned, I’ve got calls into two attorneys who promise to call me back. Meantime, for anyone looking for an advisor, unless someone is willing to sign a fiduciary oath, there’s no guarantee he or she will be working in your best interest or reveal all fees.

      Martha, I promise to circle back on this and then I’ll be writing an article about this.

  18. S. Dasgupta says:

    Hi Pamela,
    How do you know that your Fee-Only advisor is actually not a Fee-Based one ?? I mean, how do you know he’s not cracking commissions behind your back ??

    • Pam Krueger says:

      Hi,

      Love your question. There is one very simple way to verify. By the way, I always like to say verify…then trust! You’ll know for sure your advisor is truly practicing as a fiduciary when he/she is happy to sign a fiduciary oath. Those advisors, which again, are in the minority are obligated to sit down with you and walk you through every fee and expense. For example, if you would buy a bond from a typical brokerage firm, you will probably never know what you really paid. With a fiduciary advisor, you will see everything. Full transparency is the guiding principle for fiduciary behavior. Plus, when you think about it, why would an advisor who is getting paid fees by you and works only for you, want your fees to be higher or hidden? It’s in his interest to watch out for your best interest. That’s why this is the only business model that makes any sense for investment advice or financial planning. So that’s how you’ll know. And I should mention, when an advisor or his firm does receive some mix of fees and commissions– that’s known as fee-based, just remember fee-based means just that, any commissions should be deminimus. In my head, that means less than 5%. In other words, no advisor can make a living off of 5% of his revenues coming from commissions. There are instances where a particular investment might be most appropriate that fits that description. So for me, fee-based means 95% fees paid directly by the clients, full transparency 100% of the time. How else will you ever know what you’re really making?

  19. Bill Langhan says:

    Hi Pam, I enjoy reading your posts….part of my daily routine.
    I’m a 49 yr. old high school math teacher, with a degree in business as well. Even though I’ve never worked in the securities business, I’ve been doing my own investing since high school. I’m fully knowledgeable in stocks, bonds, options, FOREX, life insurance, etc. I’ve built a nice portfolio over the years and its doing well. I also own a small business doing personal tax returns for about 150 clients each tax year.
    I recently had some drinks with a college buddy (someone I trust) about working part time for him. He works for AXA as a manager and he feels I can make some good side money selling financial instruments to my tax clients, my co-workers, etc. Here’s my dilemma: The whole reason I do my own investing is to avoid the fees of paying for something I feel I can do as well as the so called ‘experts’. I don’t know if I will feel comfortable offering something to my clients, that I wouldn’t pay for myself. Now, I’m interested in making money as much as the next guy. Is there a way I can get licensed and offer financial services and planning to my clients with working for AXA or some other firm? I definitely understand investing options enough to teach people how to do it. I have no problem taking the Series 7 or 68, but are there other licenses I need?
    Thanks in advance,

    Bill

    • Pam Krueger says:

      Hi Bill,

      I think your ‘inner investment advisor’ is speaking to you. Forget the series 7 and AXA unless you want to become a ‘salesman’ pitching products to your friends and family. The sun’s setting on those days and the model is outdated. I sense you’re much more interested, especially knowing how important education is in your life, in working with people to advise them. It’s a different path. Look into finding an excellent independent registered advisory firm near you where they practice as fiduciaries and work only and directly for their clients– not selling ‘products’ but advising like real investment advisors are supposed to do. Look for a firm that has a deep bench of analytical expertise so that the principals have a CFA designation. Scour the SEC records of both the advisor and the firm to spot anything that seems out of whack to you, such as fees that higher than what RIA’s usually charge clients. Go for excellence and don’t settle for less.

      Bill, when I was 24, I got my series 7 ‘license to sell’ securities. I thought I was signing up for a career as an investment advisor and soon realized I had really signed on as ‘telemarketer.’ Here I was 24 years old, not even old enough to rent a car, but somehow I was qualified to tell 60-yr olds how to invest for retirement. Really? Go independent and if you need/want help vetting an advisory firm, just give me a call. 415.378.8240.

  20. Vishwaraj says:

    Hi
    Pam, just I need study material about
    Financial advisor. Can you?

  21. Zhong says:

    As a client of a financial advisor.
    I would I to my opinions from a client point of view.
    I am from Canada.
    I like to buy GICs for myself and like to get the highest possible rate of return.
    Unfortunately when I go to a bank like CIBC they always refer you to a financial advisor to do the signing agreement documentation. I have been with my financial advisor for many years now.
    The interest rate for GIC were not that great and lower compared to many other financial institutions, but accepted what the financial advisor offered me.
    Since I move address location I find a different financial advisor but at the same bank but different branch location. I had some GICs which were maturing so I talked the new financial advisor since I did my research and knew what the highest rates were.
    So I told her what I expected. Finally she checked with the manager and I got the rate I wanted. After a month I phoned her again about some maturing GICs again left message on her answering machine. This time some one who I know covered for my previous financial advisor who was on vacation from previous branch phoned me and I told her I was already assigned a diffferent
    financial advisor. Apparently my current financial advisor phoned my previous financial advisor who was on holidays probably to ask her to take me back as a client for GIC renewals.
    I know this after my previous financial advisor called me back to tell she will now take me back as current financial advisor to do GIC renewals. But she told me the reason why new financial planner told me to go back to previous financial planner was that I was trying to. get the best GIC rate for myself.
    I guess financial planners don’t like to be told that their competitors offering a better rate and I should take what they can give me? Which leads me to question does financial advisor or planner get commission on each GIC they renew or new one they do?

    Zhong

    • Pam Krueger says:

      Hi Zhong,

      Yes, it does sound like there is a sales commission, kick-back or bonus in the mix here. It’s really difficult for me to know for sure for a couple of reasons, you’re in Canada which doesn’t allow me to offer any real guidance as I’m here in the US, and it’s very unclear to me how the bank has set itself up in terms of owning a captive broker-dealer.

      My guess based on everything you’ve been through here is that you’re bouncing around within the broker eco-system, especially given the fact that you really don’t have an advisor but instead, it’s more like a ‘rep’ talks to you and one day it’s one person, the next day it’s someone new— and that’s not where you’re going get unbiased investment advice, guidance or true financial planning.

      I have plans expand Wealthramp into Canada so I could be more specific, but for now, we operate only in the US until next year.

      I hope this provides some guidance, and I hope you can find a really solid advisor/planner who isn’t working for a bank.

      All good wishes,

      Pam

  22. Terry Lee says:

    Hi Pam, I just came from the office of a financial planner who wants me to sign up with them on a percentage basis. I am 65 years old, retired 4 years and drawing my social security. My wife is also retired now, 65 and drawing her employer (DOD) annuity.
    I have an Ira that I have managed myself for its entire life . I say that because my financial planner was basically non- existent. Now that my Ira is at point where I don’t care if it makes any more money I want to move it to safer ground and in 5 years or so start taking some of it. I was thinking money market fund with my current broker (prudential) or CD’s. This is really all the information I need so I don’t really think I need to pay 1% fee on $300,000 for some one to tell me that. I would really appreciate your thoughts. By the way, I love this blog and will become regular reading for me.

    • Pam Krueger says:

      Hi Terry,

      I wholeheartedly agree in your case. And you can go it alone completely and do just fine, or elect to get some limited level of guidance– whatever you want. Here’s the value of what you can get from a really good, competent, fiduciary advisor: most will be happy to provide you a ‘retirement readiness’ assessment. This is where the advisor dives deep and looks at your whole picture, not just pieces of the jigsaw puzzle such as your investments. He or she will factor in your cash flow needs now and later, your withdrawal rates, how your real estate, taxes and legacy all fit in. Then and only then, can you make the best possible decision about how much to allocate in money market funds, CD’s and / or any other short term bonds, etc. Not so much for ‘growth’ but with a keen eye on what you need for income.

      Advisors can and do charge retainers or an assets under management fee if they are going to provide ongoing guidance. Or they can charge a ‘plan fee’ one time or I highly recommend once a year or at least every other year– just to make sure you’re not missing anything. Some advisors will also charge an hourly fee just like your CPA or attorney. I like it when you, the client want to collaborate and get educated as much as possible (which it sounds like you are there). I also like the collaborative approach so you can ask really good questions and even include your kids or grand kids in the conversation. What better way to introduce some financial literacy in their lives! 🙂

      Good luck and thanks so much, Terry.

      Pam

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