posted on March 15th 2016 in Fort Worth CFP Team Posts & Your Financial Advisor with 0 Comments /

I recently saw a list of the Top 40 advisors under 40 years old published in the brokerage magazine On Wall Street. Three firms produced 34 of those included on the list: Morgan Stanley, Merrill Lynch and UBS. Care to take a guess on what criteria they were ranked? On “production,” which is a friendlier way to say “commissions.” In first place was a guy who managed to generate about $9,581,000 on $441,600,000 in Assets Under Management (AUM), or about 2.2%. That’s right — the award for “best” went to the guy who can convert the most AUM into commissions. Now that’s not to say other advisors aren’t making 2.2% or even more, but this guy is generating the most total commissions.

The irony is that 2.2% is just what he got paid out of all the total fees that were charged; that was his production, not the total fee. I can’t speak for this specific advisor, but that non-transparency of fees can be quite confusing for a client. Let’s walk through a potential scenario…

An advisor is advising you on what to do with $100,000. He tells you his fee would be $2,000, or 2%. You tell him that’s too high and he agrees to drop it to 1%, or $1,000. He then sells you a product from a bank with which his firm has a partnership. He can’t go out into the free market and pick any investment; he can only choose from those his firm has specifically signed agreements to sell. You accept the 1% fee and invest the money with the broker.

But what happened behind the scenes?

The product you bought has an internal cost of 4%, which is going to drag down your performance every year. Out of that 4% fee ($4,000), the bank returns 50% to the broker as a marketing fee. In total, your fee is really 5%, but you only paid your broker 1% directly, right? The broker, however, got to keep 3% of the 5% in total fees, yet got to quote you 1% since that’s all you paid him directly — all the while you are distracted by the fact that you got the broker to cut his fee by 50% from 2% down to 1%. Dizzying, isn’t it? The broker’s firm pats him on the back for being able to generate 3% in revenue for the firm, which is counted toward his “production” for awards and recognition, while the other 2% goes to the bank to boost its bottom line and make sure the relationship of sharing clients and recommending each other’s products continues.

All of this doesn’t even include the internal non-fixed costs of the product, like trading costs, which aren’t a fixed cost and vary from year to year, so they aren’t included in the expense ratio. Now, it’s totally understandable that trading fees aren’t included because, again, they aren’t a fixed cost. But do you get to know how much is actually being charged for each trade, and where that commission is going? The illusion is that if you don’t see the fee, it doesn’t hurt performance. That’s not true. Is the fee for each trade $10, or is it $150? Out of that fee, how much is the brokerage firm keeping itself? If the firm gets any share of the cost of the trade, isn’t there an incentive to generate commissions for the firm and possibly the broker himself?

As you can see, fees start piling up. In the world of banks, brokerage firms, and wirehouses, commissions are king. Relationships between firms are sealed on generating revenue for each other.

Think you were taken advantage of in a previous relationship? Good luck. In fact, you might get ready to hear something along the lines of the following in your FINRA arbitration hearing: “No fiduciary duty was breached because the broker’s duty is strictly limited to the execution of a transaction that was authorized by the plaintiff.” All that matters in this type of relationship is that the investment met the customer’s investment objectives — that’s it. There’s no legal obligation to work in your best interest since these firms are not registered as fiduciaries with the SEC; instead they choose to register with the self-regulatory organization known as FINRA, which is supported by the industry itself.

Of course, the attention shifts now to how we are different.

First, we are an SEC Registered Investment Advisor that is held to a fiduciary standard. That just means we are legally obligated to work in a client’s best interest and avoid business that would create the potential for conflicts of interests.

How does this translate to you?

We quote you a total management fee rather than only telling you what you pay us directly but leaving out how others pay us. In fact, we can’t get paid by anyone but you. If we recommend something to you, nobody is paying us to recommend it, and if it generates a commission, we get no share of it. In fact, we have no ownership interest at all in the firms that execute trades for our clients’ accounts, so we cannot benefit in any way by trading more.

Next, some of our strategies simply cost more for us to implement because they require more manpower, are not easily scaled, require more data or analysis, etc. In short, they just cost us more to offer to you. Therefore, we simply charge more for these types of strategies. This ensures that no matter what we are recommending, we get paid the same; there is no incentive for us to use a higher cost strategy since no portion of a strategy fee is profit to WorthPointe. If we charged the exact same fee no matter what strategy we ran, there would be an incentive for us not to even offer certain strategies because they would pay us less.

When you work with us, you see your base management fees and any strategy-specific fees (if applicable) come out of the account separately, so you always know what is what. Further, we don’t bury trading fees into some internal cost you don’t see. You keep an account at a discount brokerage firm that serves as custodian, and said custodian charges the fee for transactions, which you can see in the same manner as you would if you placed the trade yourself at the custodian.

When we work with other firms in any capacity, we don’t pay them a dime — nor do they pay us a dime. We always only get paid by our clients.

In conclusion, accolades are always nice, but be careful about what is being celebrated. That trophy on an advisor’s mantle probably wasn’t given for helping clients achieve goals, rate of return or client service.

Here at WorthPointe, we know we’ll never find ourselves on a list of advisors who managed to convert more of our clients’ money into commissions for ourselves — but that’s not a list we believe in. Our success blossoms with that of our clients, and therefore the greatest accolades we receive are referrals to your friends and family who dare to come along with us as we challenge the status quo of investment advisory.

If you or your friend are interested in learning more about our fee-only approach to wealth management. Give us a call (800) 620-4232.

about the author: Joshua I. Wilson CMT

Josh-Wilson CMTJoshua I. Wilson, CMT®, AIF® is a partner and wealth manager who has managed over $2B for TD Ameritrade. Joshua led the national training and development program for all of TDA’s new advisors and managers, won a national coaching award. Joshua gave his graduation speech at Brown University. Joshua is a Chartered Market Technician® (CMT®) and a Accredited Investment Fiduciary® (AIF®).

Learn more and/or Contact Joshua

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