The Fee You Pay Isn’t Always the Incentive Driving Your Advisor

Many people think about how they are charged but rarely think of how their advisor is incentivized to work with them. At nationally known firms, advisor incentives can be confusing. When I worked at nationally known firms, there were internal meetings dedicated to our pay structure. After those meetings, advisors would then study the new pay structure to best maximize their own earnings, not necessarily the client’s best interest. 

But to make it simple, how an advisor is paid shapes your experience. If an advisor is paid every time, they sell a certain product that product will be recommended more likely than not. If an advisor is paid to get clients into managed accounts, they most likely will push more clients into actively managed accounts that carry high percentage fees for management.

One key factor that is consistently forgotten is what is the advisors’ share vs firms share of your annual account fee. What is the split of the advisory fee that goes to the advisor vs the firm? For example, some firms do a 50/50 split while some tilt the fee one way or another. Then there are some firms that give the advisor no split and instead offer a bonus structure designed around new managed money and new assets. The structures that pay advisors a bonus upfront and very little after creates a culture of hunting for new assets while ignoring existing assets. 

Clients see it all the time, the sales process is smooth. The advisor gets back to them quickly and their team seems like a well-oiled machine but is rather a well-oiled sales team.  It is shocking to think this is how most firms work, but after nearly a decade in corporate it became quite apparent that this is how most big firms operate.

Once you are a client, you will notice service teams start helping you with things rather than the advisor you signed up with. It is possible your annual reviews will be done by someone you haven’t even met before. Your advisor’s team members will consistently change and soon enough you will struggle to understand who does what. Then you’ll ask yourself, why am I paying all this money for almost no financial planning to be done?

You may ask why this is? Well, it is simple. Making a big financial decision is hard and mentally, it is draining. Once you make that decision you are not very likely to explore other options. You ask yourself, is this normal? If I switch firms, will I get the same experience? Once you are in the door, it’s very unlikely that you will leave. 

Many people will ask how I avoid this mistake. First off, it is not easy. The best way is to find an advisor whose pay aligns with an ongoing relationship. Over time the advisors pay should incentivize helping and planning for their clients rather than prioritizing new sales. 

Questions to ask when interviewing advisors. (mind you the answers might be vague)

How does your firm compensate you for our relationship?

What percentage of my fee goes to you?

If I buy this product how much will you be compensated for it?

If I move these assets to your firm, do you receive a bonus?

Some people may be uncomfortable asking these questions, which is completely understandable. You feel like you are diving into uncharted territory because it is not polite to ask someone about their compensation. The reality is if you see an advisor gets paid a lot upfront and very little ongoing expect the relationship to not be as long term as you might have been sold. You might be switched from advisor to advisor in the future because you are no longer a profitable client to the advisor but may still be to the firm. If you see the advisor is being paid a similar amount year over year for your relationship this can mean the advisor is more likely to be attentive to your needs long term and stick with you.

That is why I designed my firm the way I did. It is designed with a flat-fee. I make zero money from recommending any products, no hidden fees and no percentage fees for account management. You know exactly what you are paying and where your fee is going. There is no misalignment between the client, the firm and the advisor. To learn more, click here to set up a 20-minute call.