Understanding How Financial Advisors Are Compensated, by Wade Pfau

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Wildebeest
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Understanding How Financial Advisors Are Compensated, by Wade Pfau

Post by Wildebeest » Sat May 21, 2016 12:17 pm

Great article by Wade Pfau http://retirementresearcher.com/underst ... mpensated/

The Boglehead wiki is a great resource on financial advisors, however this article may be more user friendly for the uninitiated.


I am often in a quandary as what to say when retirement/investing comes up with acquaintances and instead of giving them the Boglehead Guide to retirement ( which I have not done yet, as it appears presumptious ), I may give them a print-out of this article.

I have had far fewer qualms with friends and family to sing the praises of the Boglehead Tenets AKA Investment Philosophy https://www.bogleheads.org/wiki/Boglehe ... philosophy and I have done well with spouse and son, but otherwise there have been no takers.

How have you handled it, when friend or family member talks about "My guy" (the financial advisor, they have put their trust for financial independence in)?

What has worked for you?
The Golden Rule: One should treat others as one would like others to treat oneself.

dbr
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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by dbr » Sat May 21, 2016 12:29 pm

I would not even remotely attempt to question people's personal financial process unless asked directly, and that has never happened, excepting my own children and managing the affairs of one elderly parent. Even then I would be very circumspect.

afan
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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by afan » Sun May 22, 2016 6:29 am

The article and table unfortunately are misleading. One would come away thinking that fee only advisors do not get commissions. He briefly notes that some advisors can switch between paid by client and paid by commissions, but he implies that these would be called fee based. Many firms call themselves fee only and say they are fiduciaries but nonetheless whip off the fee only hat and sell commissioned products.

It is a good try, but the field remains crowded with deceptive practices.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by smashhand » Sun May 22, 2016 7:03 am

Even the recommendation to "apply good common sense" to choosing financial advice requires broad life experience to be useful. Early on I enjoyed reading financial articles by Andrew Tobias. His suggested starting point for new saver/investors? TRUST NO ONE. Following that suggestion at least alerts the saver/investor that there are many people out there aiming to get a part of the money to be invested.

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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by Kelly » Sun May 22, 2016 7:05 am

afan wrote:The article and table unfortunately are misleading. One would come away thinking that fee only advisors do not get commissions. He briefly notes that some advisors can switch between paid by client and paid by commissions, but he implies that these would be called fee based. Many firms call themselves fee only and say they are fiduciaries but nonetheless whip off the fee only hat and sell commissioned products.
This is incorrect. A Fee-Only advisor who's a member of National Association for Personal Financial Advisors (NAPFA) can only accept payment from a client. They are not allowed to sell products. And they don't; I'm one. Having said that, the CFP board recently did an audit and found that many brokers who were not Fee-Only were holding themselves out as such.

Fee Based is some sort of marketing deception to lead folks to thinking that they are fee only.

It is true that a registered advisor who is not a NAPFA Fee-Only person can switch from suitability standard to fiduciary standard. A consumer should always ask what standard the advisor is following.

I don't think Bogleheads need paid advice. Read the Bernstein books and stick to you plan.

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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by earlyout » Sun May 22, 2016 7:17 am

Kelly wrote:
afan wrote:The article and table unfortunately are misleading. One would come away thinking that fee only advisors do not get commissions. He briefly notes that some advisors can switch between paid by client and paid by commissions, but he implies that these would be called fee based. Many firms call themselves fee only and say they are fiduciaries but nonetheless whip off the fee only hat and sell commissioned products.
This is incorrect. A Fee-Only advisor who's a member of National Association for Personal Financial Advisors (NAPFA) can only accept payment from a client. They are not allowed to sell products. And they don't; I'm one. Having said that, the CFP board recently did an audit and found that many brokers who were not Fee-Only were holding themselves out as such.

Fee Based is some sort of marketing deception to lead folks to thinking that they are fee only.

It is true that a registered advisor who is not a NAPFA Fee-Only person can switch from suitability standard to fiduciary standard. A consumer should always ask what standard the advisor is following.

I don't think Bogleheads need paid advice. Read the Bernstein books and stick to you plan.
So you are quibbling about "fee only" vs "Fee-Only". You say it is incorrect and then proceed to tell us why it is true.

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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by Kelly » Sun May 22, 2016 7:35 am

So you are quibbling about "fee only" vs "Fee-Only". You say it is incorrect and then proceed to tell us why it is true.
No. A NAPFA registered, fee only advisor does not sell anything. Period. That's the clarification I wanted to make.

Kelly

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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by Wildebeest » Sun May 22, 2016 9:23 am

dbr wrote:I would not even remotely attempt to question people's personal financial process unless asked directly, and that has never happened, excepting my own children and managing the affairs of one elderly parent. Even then I would be very circumspect.
I agree in principle.

I would like to find a way though, that I do not feel morally corrupt by not speaking out. It is like watching a crime in process and doing nothing.
(Even while it is legal to take 30 % of somebody retirement income).
The Golden Rule: One should treat others as one would like others to treat oneself.

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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by dbr » Sun May 22, 2016 9:28 am

Wildebeest wrote:
dbr wrote:I would not even remotely attempt to question people's personal financial process unless asked directly, and that has never happened, excepting my own children and managing the affairs of one elderly parent. Even then I would be very circumspect.
I agree in principle.

I would like to find a way though, that I do not feel morally corrupt by not speaking out. It is like watching a crime in process and doing nothing.
(Even while it is legal to take 30 % of somebody retirement income).
Yes, that bothers me also. I have been unable to resolve this against all the issues that rise when getting involved in someone else's financial affairs. But, as I said, I don't get anyone asking, never have.

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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by afan » Sun May 22, 2016 10:11 am

Kelly wrote:
afan wrote:The article and table unfortunately are misleading. One would come away thinking that fee only advisors do not get commissions. He briefly notes that some advisors can switch between paid by client and paid by commissions, but he implies that these would be called fee based. Many firms call themselves fee only and say they are fiduciaries but nonetheless whip off the fee only hat and sell commissioned products.
This is incorrect. A Fee-Only advisor who's a member of National Association for Personal Financial Advisors (NAPFA) can only accept payment from a client. They are not allowed to sell products. And they don't; I'm one. Having said that, the CFP board recently did an audit and found that many brokers who were not Fee-Only were holding themselves out as such.

I wish it were incorrect , but alas...Not only did the NAPFA find many members who advertised as fee only but took commissions, several of these people were members of the NAPFA Board or ethics committee! There ensued arguments between the fee only and the fee only plus commissions people, at least one legal case and the last I heard no resolution.

There are advisors who are active on Boglehead who trumpet their firm's fiduciary standard. They describe the operation as fee only. But if you read the ADV, they say that advisors can also be brokers who sell commissioned products. Clients "are under no obligation to buy recommended products" from the advisors who have switched hats, but that is the wall between"fee only" and "fee only while wearing the fee only hat. Otherwise, commission-based"

Some firms are part of a copy that provides both financial planning and sells insurance. The financial planners may do both, as they switch invisible hats.

There was a spate of reports about this a while back. I cannot remember the link, but CNBC was involved. I think it may have been Michael Kitces who looked at a list of "top fee only advisors" from CNBC, read their ADV's and discovered most did not fit the description Or it may have been CNBC that reviewed someone else's list of top fee only advisors and MK pointed to it.In any case, you can find it by searching on these terms.

The argument by these firms, to the extent they are willing to talk about it, is that they separate the fee only from the commissioned work. For example company A is a pure fee only financial planning operation. Company B is an insurance broker. Both are wholly owned by Company C. The NAPFA guidelines said that Company A was by definition not fee only. Then an argument. At times Company A and Company B may hav the same address, same offices and all the same employees. The separation is pure fiction.


Sad but true.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by afan » Sun May 22, 2016 10:37 am

Update after checking. It was the CFP, not the NAPFA, that got into a fight with its own leadership about the definition of "fee only". The comments about firms that claim to be fee only but also sell commissioned products stand.

If curious, look up the ADVs of some of the firms that are active here.

One could probably smoke out such a firm by asking the right questions, by ploughing through the ADV or both. But one would have to know just what they are looking for. Because of the related firm maneuver, simply asking whether the company gets commissions would not give you the answer.A also look for referral fees.

Rumor has it there are companies that function like lawyers, accountants and other professionals who charge a simple hourly fee and nothing else. You would need to know a lot to be sure you have found one.

Evidently there is far more to be made with assets under management fees and commissions than hourly rates.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by dbr » Sun May 22, 2016 11:43 am

In general investors cannot afford to pay what advisors require to stay in business. That is pretty much the whole story right there.

Disclaimer: I will admit to cases where an investor should pay the cost, but for pure advising distinct from the services of an attorney or a tax accountant, these cases are few and far between, and such investors run a high risk of paying too much for too little and especially for harmful, perhaps very harmful, advice and unsuitable products. Investment management is distinct from advising and also subject to the same issues.

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Re: Understanding How Financial Advisors Are Compensated, by Wade Pfau

Post by afan » Sun May 22, 2016 2:57 pm

Apparently Allan Roth offers such a service and manages to make a go of it. Since he provides only advice, I would think his expenses would be a lot lower than someone who manages large amounts of other people's money. No need for a big staff. Much lower need for liability insurance. No need for expensive software to manage the finances, deduct the fees, generate client reports...

But this sort of structure requires a constant flow of new clients, since they do not generate regular recurring fees. It is hard for an AUM manager to justify a workable fee for running a 3 fund portfolio. Hence the absolute need for such advisors to come up with complexity. If it really should be simple, then why pay a lot, or anything, to sit on a portfolio for years on end?
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Re: Understanding How Financial Advisors Are Compensated, by Wade Pfau

Post by LadyGeek » Sun May 22, 2016 3:04 pm

This thread is now in the Personal Finance (Not Investing) forum (financial advisers).

Be sure you understand the difference:

- Financial planner
- Investment adviser
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Re: Understanding How Financial Advisors Are Compensated, by Wade Pfau

Post by afan » Sun May 22, 2016 4:35 pm

Kitces on the CNBC list of top "fee only" advisors

https://www.kitces.com/blog/9-out-of-to ... ure-rules/

More from Kitces on RIA's, "fee only" and commisions

https://www.kitces.com/blog/can-a-fiduc ... mmissions/

Includes a piece by Duane Thompson about the relationship between fiduciary, fee only and commissions

The CNBC piece

http://www.cnbc.com/2015/06/03/cnbc-cha ... firms.html

More on the Camarda CFP case

https://www.kitces.com/blog/the-goldfar ... e-debacle/
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Re: Understanding How Financial Advisors Are Compensated, by Wade Pfau

Post by Wildebeest » Sun May 22, 2016 4:36 pm

I thought Wade Pfau did an excellent job explaining how the investor needs to make sure his investor advisor is fee for service is fee-only and has a fiduciary duty and can not wear any other hat.

My plan would be to high light these last two paragraphs of the article for friends and family in need of a investment advisor:

"Many advisor websites make it difficult to understand how they are registered and what sort of standard of care they provide. It would be simple if we could just separate the advisors from the brokers, but a number of advisors are registered as investment advisors and brokers or agents.

Dual registration muddles the situation for clients further, as it may not always be clear when the advisor is wearing the hat of a fiduciary, and when they are making recommendations under suitability requirements. Because they can also receive commissions, such dually registered advisors should use the term “fee-based” to describe their firms, rather than “fee-only.” Clients could then have a clear understanding of when they are being served under the fiduciary or suitability standard".


Allan Roth is fee-only and a lot of Bogleheads have done well finding a fee-only advisor throught the Garrett Planning network.
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Re: Understanding How Financial Advisors Are Compensated by Wade Pfau

Post by joebh » Sun May 22, 2016 7:40 pm

afan wrote:There was a spate of reports about this a while back. I cannot remember the link, but CNBC was involved. I think it may have been Michael Kitces who looked at a list of "top fee only advisors" from CNBC, read their ADV's and discovered most did not fit the description Or it may have been CNBC that reviewed someone else's list of top fee only advisors and MK pointed to it.In any case, you can find it by searching on these terms.
https://www.kitces.com/blog/9-out-of-to ... ure-rules/

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