Fee-based versus Fee-only versus Commission

Making Smart Decisions with Josh Tirado

Josh Tirado: I'm Josh Tirado. And you're listening to making smart decisions.

[00:01:47]When choosing a financial advisor, there are many different ways that they can charge you today. We are going to go more in-depth and unpack the different options that are available out there, and which option is best for you.

[00:01:58]I'm going to do three broad categories. There's a person who is paid on commission. There is a person who is what they call fee only. And the last option is an advisor that is fee-based. I'm going to save fee-based for last because I admittedly I am biased because I am fee-based.

[00:02:18] And from a compliance standpoint, let me say right now, I don't know which one of these is right for you. they are very individual decisions, and each one of these options has different pros and cons. And you have to decide which one is right for you and your situation.

[00:02:36]Let's start with, somebody gets paid via commission. They are a sales person inherently. There is nothing wrong with salespeople. The world does not go round unless things are sold, and people buy, but understand that person's responsibility first and foremost, lies to the company whose product they're selling.

[00:02:55] secondarily; their responsibility lies with you. But first and foremost, they're a commissioned salesperson representing a certain company or a certain product or a family of products.

[00:03:09] When you're doing your due diligence and looking to hire somebody, look on their website, but not just on the first page, dig down a little deeper. There's usually a lot of extra disclaimers around commission saying that they are a commission, and they are selling certain products.

[00:03:24] Just know that certain things pay more than others. And the responsibility, first and foremost, is the company that they're representing, not to you as the consumer. Next is the complete opposite end of the spectrum and advisors that are fee only. This is often viewed as best for the client or taking the high road.

[00:03:47] So some fee-only advisors. Charge a fee for giving advice; whether that be an hourly or annual retainer, they're purely giving advice. They're charging you a fee. They do not handle the investments in the insurance or anything in any way, shape, or form. Then there are fee-only advisors who charge a percentage of the assets that they manage for you.

[00:04:11] Generally speaking, they have higher minimums because you need to bring over a certain level of assets for them to charge enough for it to be worth. their time as business personnel manage the assets. So fee-only can be a fee for the advice. It can be. I'm just charging a fee for the assets that I manage, or it could be both.

[00:04:29] It could be a separate fee for advice. And if you need the asset management, they switch over and put that hat on. And there's a fee for the separate skills and time that goes into managing those assets. Most fee only people I've met are very proud of being feeling, so they do not handle anything.

[00:04:47]that is commission-based whatsoever. It's purely a fee that is cut and dry. That is easily disclosed. And that is option number two. Now we're gonna go to option number three fee-based, which is what I personally am. And what I mentioned before, I'm biased towards. Over the past 20 plus years, I've come to the conclusion that I feel fee-based at this point in time is the best and offers the best outcome and the most options to my clients.

[00:05:19] I am charging a fee for the financial plan for the retirement plan, for the advice and the 401k for the advice on insurance, for the advice on whatever we do. And we always start with the plan because I don't know what to suggest to you as a course of action until we have a plan.

[00:05:38] And that plan is the client's plan. That's your plan. You're telling me your goals, your dreams, what you want to accomplish. We are then taking them and backing into them. How can we achieve those financially? And then we discuss what the options are and the different strategies we can take. To achieve those goals.

[00:05:57] And if those goals are achievable or if they have to be edited, but we are looking at your plan to achieve your goals. From there, we can look at what do we have to do strategy-wise to accomplish those goals and strategy-wise, what works best for you? What makes the most sense? What investments are right for you?

[00:06:14] What insurance do you need in place to backstop your plan? What level of savings things do you need? What is the biggest? Threat factors that could derail your plan that we have to look at them and plan for whether that's 401k, social security investments, whatever it is we put together.

[00:06:33] The plan first, you are paying a fee to get that plan. If one of the recommendations is that we should have some actively managed money, and you want me to manage the money then again, just like fee-only, there's a fee there to manage the money. There's a fee there to put together the plan.

[00:06:52] Cause you're basically paying for the time and the set of skills to put all that together. But then I'm also still able to do commission-based products. Now I do not lead with commission-based products. I don't use them that often, but I feel that I would be doing a disservice to my clients if I completely excluded that set of investment options that are commission-based because.

[00:07:16] There are some investments out there that the structure and they're normally insurance-based investments. The structure, those investments do not allow them to be fee only. They're set up to charge a commission. There is no way to waive the commission and to just charge a fee. In some cases, I can waive the commission.

[00:07:37] However, the company that's providing that product does not change the cost to the end consumer. They just simply. Keep the commission instead of paying it to me, life insurance, for instance, and there's a commission on term care.

[00:07:52] There's a commission. There are certain annuities that provide guaranteed income that you can outlive that are part of your liquidation strategy. To provide income and retirement. There are certain other investments that are set up as on a commission basis. Now some of them are now at a spot where they can be fee-based instead of commission-based and I'm gravitating towards that.

[00:08:16] But there's a whole category of products out there that are structured for a commission, and there is no fee option. I don't want to exclude them and say that the clients do not have access to all these products because of their compensation.

[00:08:30]it is disclosed in advance that if we do these certain products or I'm recommending these to you as part of your plan if you move forward with it, these certain products or these certain strategies, There's a commission that will be paid. And here's what the commission is versus the fee. So it is disclosed.

[00:08:49]. And oftentimes, the reason we go with the commission versus the fee is the commission is a onetime payment. At the same time, the fee may be ongoing for five, 10, 15 years. And the fee option actually becomes more expensive over time than the commission option. That's also something that I'm very proud of.

[00:09:07] The industry is working to correct where they're saying, okay, if you charge a fee, you can only charge a fee for a certain amount of time until it reaches what the commission option would ...