Questions we are often asked about our industry.
Why do I need to pay for services when there is a broad range of financial information available?
Information is not necessarily knowledge and is not a substitute for wisdom, experience and well informed professional judgment.
How do I know that a planner will always act in my best interest?
You don’t, you can listen to comments from friends or others but this will not be clear to you until you meet, engage and work with a planner. However, PDS Planning has been a fiduciary since day one meaning we will always place the interest of our clients above our own.
What if I am only interested in someone managing my investments?
There are firms that focus solely on investment management, identifying your risk tolerance and time horizon, selecting an appropriate allocation, and managing your rate of return. At the same time, there are firms who take a holistic approach in helping you develop a life plan which include advice in the various areas of discipline: retirement planning, investment management, cash flow and tax planning, insurance planning , estate planning and education planning. The key is to ask enough questions so that you can identify a firm who’s approach aligns best with your financial needs.
Help me understand the different fee structures of financial planners?
We believe it is critical for consumers to understand how advisors are paid. There are three methods of compensation in the planning/advisory industry.
The first, and we believe the easiest to understand, is a fee-only structure. In this, clients pay the advisor a fee for services rendered. This could be in the form of an annual retainer fee, a fee based on a percentage of the client’s investment assets that are actively managed, or a combination of the two. Under this arrangement, the planner/advisor is paid directly by the client and receives no commissions for the investment advisory services performed. There is no inherent conflict of interest and there is no incentive for the advisor to favor one product over another because of the potential commission income. Clients may pay the advisor directly or may have the fee deducted from their investment portfolio.
The second method of compensation is commission-only income, where the advisor is compensated directly as a result of products that are sold. In this arrangement, the advisor holds a securities and/or insurance license in order to receive commission income and is registered with a broker/dealer, who establishes a commission payout level for the advisor. The mutual funds and insurance companies pay the commissions to the broker/dealer, who then pays the advisor. These up-front commissions generally range from 0.25% to 5% of the total initial investment amount. In addition to commissions paid from sales of products, the advisor may also be compensated on a quarterly basis from trail commissions paid by the mutual funds and insurance companies. Mutual fund trail commissions, when they exist, are part of each fund’s 12B-1 fees, and can range from 0.25% to as high as 2% per year, depending on the specific fund. Because there are different commission payouts on different products, there may be an incentive for an advisor or the advisor’s broker/dealer to use a higher-payout product over a lower-payout product.
The third method of compensation is a combination of fees and commissions, sometimes referred to as fee-based. In this arrangement, the advisor may charge a fee for services, and the fee may be reduced or offset by commissions received from the sale of investment products, as described in the preceding paragraph.
A fee-only arrangement does not guarantee honest and ethical dealings, nor does receipt of commissions mean an advisor is not to be trusted. The key is disclosure. Potential clients should ask advisors how they are paid and expect full and complete answers, both verbally and in writing. It is not un-polite to ask “How will I pay you for your services?” If the answer is fee-only, ask for details as to how the fee is calculated. If the answer is commissions, ask for details on the broker-dealer arrangement on both up-front commissions and trail commissions. If the answer is fee-based, ask for details on how both parts are calculated. Ask for a copy of the advisor’s Form ADV Part 2A, assuming the advisor is registered with the SEC or their state of residence. Section 5 of the ADV provides the details on the advisor’s compensation method.