The financial services industry has three main fee models. Each model serves a purpose and provides important benefits to clients. However, we continually find that many people do not understand the costs they incur when selecting an advisory firm or financial/insurance product. At Lighthouse Financial we want you to be educated and empowered to make sound decisions with total fee disclosure. Below are the three most popular fee structures:
Some advisors at brokerage houses and all insurance agents offer investment and insurance options which provide a commission back to the advisor. If you’re purchasing an annuity contract, life insurance, or structured investment product, then you may be providing a portion of your assets back to the advisor as a commission. The commission is typically added into the costs of the product being purchased and, may give the client the impression that the product is “free”, when in reality, the non-disclosed internal fees may be quite high. While it may be necessary or desirable to purchase one of these contracts or security options, we recommend that you ask the following questions prior to purchasing:
- What is my expense ratio?
- What is your commission?
- Please provide me a breakdown of each fee incurred in this account.
- Are the commissions and fees one-time or is there an annual fee requirement for the length of time I hold this item in my portfolio?
This type of fee structure allows the advisor to select either a commission-based product or provide and flat fee for service. This hybrid billing approach is typically used by insurance companies and brokerage firms. Studies show that the development of this fee model has created a significant amount of confusion for consumers. We recommend that you ask the following questions before engaging in a relationship with a fee-based organization*:
- What are your professional qualifications and what is your educational background as it relates to dispensing financial advice?
- What is your expertise?
- How are you paid? (fees, commissions or a combination of both)
- Do you adhere to a fiduciary standard?
- Why are you recommending this product to me? Why is it suitable for me? Is there a better option?
FEE-ONLY firms take on the fiduciary responsibility of putting the client’s needs first, always. Firms, such as Lighthouse Financial, do not receive commissions, do not accept back-end benefits, and do not have conflicts of interest when selecting products and services for the client. The FEE-ONLY advisor is obligated to provide clients a “Best Fit” recommendation rather than a “Suitable” recommendation. Advisors and firms functioning in the FEE-ONLY model may be paid hourly, by a retainer, as a percentage of assets under management, or offer a flat fee. Questions to ask**:
- Are you always a fiduciary, and will you state that in writing?
- Does anyone pay you to advise me and, if so, do you earn more to recommend certain products or services?
- Do you participate in any sales contests or award programs creating incentives to favor particular vendors?
- Will you itemize all your fees and expenses in writing?
- Do you earn fees for referring clients to specialists like estate attorneys or insurance agents?
- Which professional credentials do you have, and what are their requirements?
- Who manages your personal assets money?