Executive Summary

On this Episode of Financial Discretion Advised Abrin and Tyler bring Craig back on to chat about financial advisor compensation. There are some big differences in how professionals in this industry are paid and it is very important to understand how those may impact the advice you receive.  

Compensation Models 

Craig breaks down the differences between the 3 different compensation models and how those may impact you.  

Commission-based – This is exactly what it sounds like. A commission-based advisor receives a commission for selling you a product or a stock. Very common commission-based work would be an insurance salesman selling a financial product. That professional would sell the product to a client and then they receive a generous commission from the company who provides the product. As a consumer you know what you are getting within this model. However, this model invites competing interests and does not always tend to favor the client.  

 Fee-Based – A fee-based Advisor is one who usually charges an asset under management fee while working with a client, but they also hold on to the ability to sell financial products for a commission. The asset under management fee can help to align the interest of the financial advisor with the client, but the ability to sell products for a kick back can create some conflicts of interest.  

These advisors work under the suitability standard, which allows them to make recommendations to their clients if they can make an argument the product is suitable for their situation. This is a very low bar to jump and can leave clients feeling like their advisor is acting in their best interest, without understanding that there are other people lining their pockets for pushing product.  

Fee Only – In this model the advisor only charges an asset under management fee and holds NO licensure that allows them to make a commission. This doesn’t mean that the advisor can’t help a client shop for financial products, but instead it allows them to do so without any conflicts of interest. These advisors operate under the fiduciary standard, which bounds them to always act in the best interest of the client.  

In this model the client is the only person paying the advisor, and there are no outside pressures on the advisor to push product.  

Why is this important? 

Craig, Abrin and Tyler discuss why this is important and why people really need to understand what kind of model their advisor is working within. By thinking that your client is a Fee Only Advisor, you may be receiving financial advice that your advisor is getting a kick back on. It can seem like an insurance product is just part of the financial plan you are receiving when your advisor is actually receiving a 5-7% kickback for selling you that product.  

 If you are working with a financial professional, don’t be afraid to ask them how they are compensated. Their answer should be very clear and easy to understand. If they are allowed to make a commission, they are not a Fee-Only advisor.  

Doesn’t the government regulate this and protect the consumer?  

This is a common assumption made by folks who are starting a relationship with a financial advisor. The SEC and FINRA are governmental bodies who work to regulate the industry. FINRA regulates the sales of financial products. If your advisor is regulated by FINRA they are not Fee Only and can sell you products for commission.  

There are two professional bodies that hold advisors to the Fee Only structure, the CFP Board and NAPFA. However, these bodies don’t have the ability to monitor this 100%. This makes it extremely important for consumers to ask questions about compensation structures.

DISCLAIMER: The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. 


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Full Transcript

Abrin: Welcome to Financial Discretion Advised. I’m Abrin Berkemeyer.

Tyler: I’m Tyler Hafford. Let’s cue the music.

Abrin: Hey everybody, thanks for joining us today. We’ve got special guest Craig Joncas on, unofficially for the fifth time. We had a lot of audio problems today. So this is our-

Craig: You guys have a special guest

Abrin: No, we’re going to keep treating you well so that you come back eventually, even though we’re going to clean up the stock game today. So we might not want you back after that, but Craig’s on because we’re going to talk about advisor compensation today and talk about fees. But right before we jump into that, let’s clear up the stock game. Last time Craig was on officially was for the Roth conversion podcast. His first time was on for the teamwork podcast, and now he’s joining us today. When we talked about the Roth conversion podcast, we were doing a little stock game. Tyler and I have been blown out of the water and have dropped the stock game since Craig kicked out butts.

Tyler: I’m really hoping that the audio works on this because I cannot relive this again.

Abrin: Right, we keep rubbing it in each time we re-record.

Tyler: But why don’t we give people the numbers?

Abrin: Yep. Yep. So Tyler had Roku since our last podcast with Craig, it’s down at a 1.6% loss. I had Tesla, 7% loss. And Craig, the whopping 25% gain on Genworth, so kudos to you.

Tyler: Nice. Yeah.

Abrin: The more you brag, the less likely we are to have you on for another podcast.

Craig: Impressive that you guys managed to lose money in a raging bull market.

Tyler: I was going to say, for anyone, this is a good reminder, don’t take any of our recommendations. These are not recommendations, it’s just a game. Abrin and I were able to pick the two stocks that did not go up since January 29th, and Craig hit on a penny stock.

Craig: If anyone out there there is looking to be a financial advisor, I might need to be replacing two of them, so reach out.

Abrin: All right. All banter aside, let’s talk about advisor compensation. There’s really two ways advisors are compensated. One is commission-based, and then the other one is fees charged directly to clients. So let’s jump into commission-based work and then we’ll talk about direct fees, and then we’ll talk about how that correlates into how advisors market themselves and how they charge their fees and things to be aware of. So where do we want to start, commission-based work. Why don’t we start with commission-based work.

Tyler: Yeah. Craig, why don’t we dive into that and then walk us towards fee-only, and then we can kind of examine the hybrid of those two different models.

Craig: Yeah, sounds good. So I think, like Abrin said, the two ways to get paid, commissions and fees. And like Tyler was saying, that’s going to break down into three different models for how an advisor chooses to market themselves, commission-based or commission only, fee-based and then fee-only. So we’ll walk our way towards that as we go, but commission-based is pretty straightforward. As fee-only advisors, which we’ll get to in a little bit, a commission-based model obviously isn’t a favorite of ours. But one thing you’ve got to give credit to commission-based model for is you know what you’re getting. A Commission-based advisor typically is somebody who is an agent of an insurance company. As an agent, that means they owe their allegiance to that insurance company and they’re going to be selling you products or mutual funds that pay them a commission for that sale.

Craig: And that’s the only way that they get paid is on those commissions. That can come up front, it can come in the form of trails, which would be ongoing compensation to that advisor for the sale. Typically that advisor gets to pick how they’re compensated, whether it’s upfront or ongoing, but you as a client understand that you’re getting sold something for a commission, and in some environments that works well.

Tyler: Yeah. And just to jump in before we move forward, any older folks listening to this may remember back in the day, the only way you had access to stock markets, call a broker, put in a trade, you’d pay commission on that trade and that’s how that financial advisor would get compensated, by buying and selling stocks for you. That’s that old commission model. Certainly not the way most people are doing it today, but it’s still out there.

Craig: Right, absolutely. You’re right. So it’s not just the insurance company advisors. I think insurance company advisors are probably the most prevalent form of commission-based model today, but that old model still does exist too where your stockbroker was commission-based and really only got paid when they were buying and selling.

Tyler: All right. Other end of the spectrum, fee-only. Direct fees to clients, why don’t we talk about that a little bit?

Craig: Yeah, sure. So fee-only, complete other end of the spectrum. Really the definition of fee-only is that those advisors cannot be paid through any other means other than the fees that they charge directly to their clients. So those fees usually come in the form of either a percentage of the assets that they’re managing for clients or some sort of a fixed fee, hourly fee, monthly fee or something like that, to kind of be kept on retainer with the advisor and do financial planning work and investment advisory on occasion.

Craig: So yeah, those advisors, complete opposite. Can’t do anything for commission.

Tyler: And it seems like the industry is making this transition from the old commission model into the fee-only model. Plenty of advisors out there, not ready to give up their ability to make some commissions. So we find this hybrid model of these two called fee-based. Do you want to talk to that little bit, Craig?

Craig: Yeah, absolutely. So fee-based, just like you said, it’s just the hybrid model. It means those advisors have the ability to both charge fees directly to their clients, like a percentage of assets under management, which is probably the most common in that model, or fixed financial planning fees. But then in addition to that, they can sell products for a commission and receive revenue there too. So yeah, just the hybrid model when you call yourself fee-based.

Craig: But really important to unpack that, I think we’re going to talk about it some more because those two things are not the same, and so many consumers at the end of the day think fee-based and fee-only are the same thing, but they’re not.

Tyler: Yep. And I think we should, let’s unpack that. Before we get into that though, who’s paying attention to make sure that you’re following whatever compensation structure you’re saying you are? Is the government coming knocking to make sure Craig Joncas is fee-only, or how is that monitored?

Craig: Right, it’s so interesting. So there’s not a lot of monitoring of that going on, but generally there’s two types of bodies that may or may not monitor. And that’s your regulatory bodies, which are the SEC and FINRA, I’m sure we’ll talk more about, and then there’s professional associations or networks, like the CFP Board or NAPFA or XY Planning Network. There are many of them out there for CFA designations.

Craig: So in these three worlds we’re talking about, fee-only, fee-based and commission-based, on the fee-only side of it, it’s really just the CFP board and NAPFA that are looking after this. The SEC does not really take a look at what firms are calling themselves, fee-only versus fee-based or if they’re actually structured that way. So that actually adds to some murkiness on the fee-based side, because definitely we’ve seen instances of advisory firms that maintain the ability to sell things for commission but call themselves fee-only. And that’s just not the way it was meant to be, but if they’re not CFPs and they’re not members of NAPFA, they don’t have a body that’s kind of holding their feet to the fire on that.

Abrin: That’s pretty tough for consumers too, because obviously there’s a lot of disclosures you have to put out about how you get compensated, but it’s really tough for a prospective client or a client necessarily to go through the 150 page disclosure brochure, find out where the fees are and then find out how you’re getting compensated and the different revenue sources for the [crosstalk 00:08:34].

Craig: Yeah, and is that a fee or is that a commission? Because some people think the percentage for portfolio management is a commission, but it’s not. So to even really identify that, it’s really hard.

Abrin: Yeah. So I think that does put some of the onus on the client, obviously, or the prospective client to ask good questions, and then also some onus on the advisor to represent their fees in a clear and concise manner.

Craig: Definitely, yeah. I think anytime I’m talking with a prospective client and we’re talking about this, the first step is I always recommend, ask your advisors. How do they get paid? Are they fee-only, are they fee-based, what’s their structure? 90-plus percent of the time, you’re probably getting a straightforward, honest answer, but I do think we live in a world where “trust but verify” makes sense.

Craig: And if you want to verify it, I think the best way to do that is to look through their ABV brochures, understand where they hold the licensure, if they’re members of NAPFA or if they’re CFPs and if you know those appropriate bodies are actually holding them to it.

Tyler: Yeah. And I think it’s important to be asking that question and the reason is not just, “Oh jeez, Abrin makes his money off commissions or fee-only”. It has a direct correlation to the type of service you’re getting. And I think that’s what we’re talking about, breaking down a fee-based versus fee-only. In that fee-only model, the only one who’s paying that advisor is you as the client. In the fee-based model, you’re paying that advisor, but the advisor also might have some outside actors who could kick them some money if they’re going to kind of present products to you and you’re going to purchase those. So why don’t we get into making sure to know the differences between fee-based and fee-only, so we’re not getting tripped up by those types of things?

Craig: Yeah, sounds good. So I think maybe I’ll start with the most common trip-up that I see in the fee-based side of things. So fee-based, I think, has the potential to be the most murky out of the three models. If you’re fee-only, you’ve committed to a no-commission setting. If you’re commission only, you’ve committed to a commission setting. But fee-based is kind of this hybrid model where the advisor can be slipping things in and operating under different compensation arrangements at any time. So the most common thing that might occur under a fee-based model where there’s a commission being slipped in is sale of a mutual fund or a variable annuity product.

Craig: And it’s because those things just feel a lot like the ongoing investment management that you might be getting from the advisor. They’re managing a pool of your money, then one day you do a review and they say, “This variable annuity from Jackson might be appropriate for you. Here’s a little bit about the investments,” and they make you sign something and it just feels like more asset management. But at the end of the day, those variable annuities can pay an advisor six to 8% up front. I mean, that is motivational. A hundred thousand dollars that’s being put into a new product like that, that’s six to $8,000 of commission that’s being made.

Tyler: Yeah, and we talked about this too a little bit before the show, and if anyone knows this, please write to us and give us the answer. But I don’t know if there’s a minimum of how much needs to be in the fee-base work you’re doing when you call yourself fee-based. Could I be managing $2,000 for you and charging a fee on that, but sell you a $200,000 annuity and still say, “Well, I’m a fee-based advisor,” and doing that? I don’t know if there is any type of restrictions on that.

Craig: I certainly haven’t heard of a restriction on that in my career. I have no way of figuring that out. It seems like anyone that does a little bit of fees and a little bit of commissions, or maintains the right licensure can just call themselves fee-based. The good fee-based advisors are probably doing 90-plus percent of their stuff through fees. The ones that I think are probably just trying to hide most of it are probably doing it the other way around, 90% of their stuff through commission.

Craig: But again there, tough for the end consumer to really know what’s going on when somebody calls themselves fee-based.

Tyler: Right. And the big thing here, I think as well with fee-only and fee-based, is that there’s a standard of care that is different between the two models. And Craig, I’ll let you dive into the suitability versus the fiduciary standard here. But you really want someone who is only acting in your best interests and putting you before themselves, not necessarily the case when you’re working in the fee-based model.

Craig: Yeah, exactly. So I’m going to back that one up and might go down a little bit of a rabbit hole here, but yeah. So, different standards of care in these models. Generally in our industry, there’s two regulatory bodies that might regulate advisors. Those two are FINRA and the SEC. And advisors can choose to register with either both or just one of those entities and hold themselves up there as a financial advisor. In fact, you don’t even need to register with either and you can actually call yourself an advisor, but that’s a longer story.

Craig: So FINRA holds their advisors to a suitability standard, and that just means that recommendations made by the advisor just need to be good for a client. They don’t need to be best for a client. And there’s also a big difference there, and that’s at the moment of a recommendation. So it’s a moment in time rather than an ongoing duty of care to a client to understand their financial situation, keep up to date and make best recommendations. So the suitability standard is what FINRA holds their advisors to.

Craig: The SEC holds their advisors to the fiduciary standard. And the fiduciary standard is definitely out there in the news. I think a lot of consumers have heard that word, know that it’s stronger standard of care, but basically just means the advisor needs to put their client’s interest ahead of their own interests and requires that ongoing relationship of knowing your client, knowing their financial situation goals, and making sure that they’re doing things that are in their interests. So definitely a stronger standard of care. And as that relates back to those three models, a fee-based advisor registers through both FINRA and the SEC, which is why they can place commission business through FINRA and they can place fiduciary fee-based business through the SEC. So they can jump back and forth, and we’re just never really sure. The fee-only model is the only model that acts as a fiduciary 100% of the time, and it’s because a fee-only advisor actually strips their licensure with FINRA. They don’t have insurance licensure. They only maintain license shirts in the SEC, which has held to that higher standard and doesn’t allow for a commission sales.

Abrin: And that’s one way that any client or prospective client could quickly, just at a glance, find out if an advisor is fee fee-based or fee-only. Any business card or email handle, you’d see the FINRA disclosures and then you know that they could be doing some type of commission-based work and they’re fee-based, not fee-only.

Craig: Exactly. FINRA calls their advisors brokers. When you look them up on FINRA BrokerCheck, there it is right there. It’s a broker check. They’re selling things for commissions, and so you can look them up online and check them out, but they’re going to be selling things. And the SEC calls their advisors “advisors,” fees for advice.

Tyler: And the industry seems to be making the transition from the old commission way of doing things to the fee-only way of doing things. Obviously if we break out a suitability standard versus fiduciary standard, as a client you would probably tend to want that fiduciary standard. So I can see why the industry is moving that way. I also believe that’s why the titling of fee-based is almost kind of like fee-only. It’s getting them closer to that standard of care, which I think seems superior, but really important for people who are working with their advisors to know the distinction between those two.

Craig: Yeah, absolutely. Got to kind of peel the cover off and look underneath what’s going on behind the scenes. And I said, it starts with asking, but then verify too.

Abrin: Yep. Definitely. So yeah, in the fee-only space, how do we get paid, Craig? What are the kind of mechanisms that somebody might be paying an advisor for work that they’re doing, whether it’s asset management or financial planning or both?

Craig: Yeah, great. So you mentioned at the start, really the way that we get paid as fee-only advisors is through a percentage of assets under management. And that’s usually to manage a portfolio of assets on an ongoing basis for clients. We managed with discretion, not all advisors do, but we do. And then the other way that a fee-only advisor might get paid is through some sort of fixed fee. That could be chopped up a lot of different ways. It might be a fixed hourly fee, where you can hours from an advisor for financial planning work. Might be a monthly retainer, an annual retainer or something like that. So a bunch of different ways people might structure that, but generally it’s some sort of fixed out-of-pocket fee for financial planning work, without the requirement that assets are managed.

Abrin: Yeah, we’ve definitely seen a lot of fee compression in the industry over our lifetimes. They say the national average for financial advisor for an assets under management fee is north of 1%, I think it’s like 1.01%. Obviously some advisors out there have higher fees than that. 1.2, 1.5, you get into that. Some have less.

Craig: Yeah, a lot of wirehouses even require a minimum fee now, especially for smaller accounts where they won’t charge less than one and a quarter or one and a half.

Tyler: Certainly.

Abrin: And then I think a lot of the downward pressure, at least on the investment management side, has been coming from the robo-advisor space. Obviously that’s where they charge you a lot smaller fee because you’re kind of in a “set it and go forward,” and get a little bit less service.

Tyler: Yep

Abrin: You kind of fill out a questionnaire online. You want to speak to robo-advisors a little bit, Tyler? You seem to be picking up a little bit over there.

Tyler: Yeah. I just think it’s important for folks out there who are shopping around to know there is, I think, a big difference between sitting in front of an advisor and working with a robo-advisor. Robo-advisor, like you said, cookie cutter mold, probably answer a questionnaire, send it out. That robo-advisor might be putting you into proprietary funds where that company is making expense ratios off of you. So it seems really cheap because of the 0.3% they’re flashing out there, but I think understanding that the service behind that is going to be a lot different than sitting down with an advisor. So I do think fee compression in the industry is something that is happening. I think if you’re paying upwards of one and a half percent, you should probably shop it around a little bit, because you can probably beat that. But know that in this space, sometimes you get what you pay for. If you’re looking at a robo-advisor, you’re just not getting a full wealth management relationship that you may be with an advisor.

Craig: Right, absolutely. Yeah, a lot of different models. Everybody’s needs are different, so you’ve got to try to match up what’s right for you, but definitely there’s a difference in service being provided across those models and like anything else there’s different price points for services received.

Tyler: Yeah. Well, I guess to kind of wrap it up, Craig, just to talk to you as a business owner, you started Penobscot Financial Advisors with Jim Bradley, who we had on the last podcast. You guys decided, “Hey, we’re going to do this a certain way. We’re going to be fee-only. We’re going to be fiduciaries.” What kind of led you in that direction? Because you certainly didn’t have to.

Craig: Yeah, definitely. The number one thing that kind of led us in this direction was our history and upbringing in this industry. Both Jim and I, when we started in this industry, which has been with the same company the whole time, we ran this business through an insurance company broker dealer.

Craig: So we understand the conflicts and the motivations that surround money and how they can influence people, and it just wasn’t a world we wanted to be in anymore. It just didn’t feel right. When you think about your financial advisor and the person who might be managing all the aspects of your financial wellbeing over the long run, it seems like a pretty small ask that they be your fiduciary and that they act in your best interests all the time. So just that history made us understand those conflicts. We knew it didn’t feel right or best. Unfortunately when you are a small business in this industry, a lot of times you need to get started through an insurance company because it’s harder to get started as an independent entity, but we always knew we wanted to move in this direction. And frankly at the end of the day, since we have been independent and a fee-only advisor, the conversation’s just a lot easier with clients.

Craig: We talk about fees, our fees are transparent, they’re right on our website. And we’re either a good fit or we’re not, we figure that out upfront and then we get onto the important stuff, which is working with these folks, delivering outcomes. So just a lot more transparent, easy mutually beneficial relationship with clients.

Tyler: Yeah. Just from working on both sides of this in my work experience, the fee-only fiduciary model certainly seems like the more holistic way of doing this job. Follow the money. If the only person who’s paying us as the client, we’re acting for that individual. So I think it’s the way we should be handling this business.

Craig: Definitely.

Tyler: Yeah. Well, thanks for coming on again, Craig. Maybe we’ll have you sometime on in the future. We’ll see.

Craig: I enjoyed it. Yeah. I’m noticing that you’re not asking for my next stock pin, so I assume I will be invited back. You guys will just put your tails between your legs and go.

Tyler: I’ll tell anyone listening, find us on any podcatcher, YouTube out there. Jim has written some good blogs on this stuff, so check out our website for that. This is a good piggyback on the conversation of our first episode, “What The F,” where we talk about the fiduciary standard and suitability standards.

Craig: Still one of my favorite episodes. First episode ever, but quality. Love that one.

Abrin: Yep, so go back and check that out. Fair warning, audio quality today is a lot better than it was back then.

Craig: Absolutely.

Abrin: You’ve been warned.

Tyler: Speaking of audio quality, I hope this one worked.

Tyler: The foregoing content reflects the opinions of Penobscot Financial Advisors and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Thank you.