It should be no surprise that I am a big fan of financial advisors. After all, it has been my business for the past 35 years. In my experience, people who get good financial advice tend to have greater clarity in their financial lives and tend to make better progress toward their financial goals. However, shopping for an advisor is a lot like shopping for a new pair of shoes — one size does not fit all. And no matter what kind of advisor you eventually choose, you need your relationship with that advisor to be productive and strong. That’s why it pays to be very intentional in your search for the right advisor. You need someone who understands what you are trying to do and who will work with you in a way that gives you confidence.
Advisors come in many shapes and sizes, but they generally fall into three categories — commission-based, fee-based, and fee-only. Understanding how different advisors work will help you decide which is most suitable for you. This week’s column focuses on commission-based advisors. Next week, I’ll discuss fee-based and fee-only advisors.
The most common commission-based advisor is the full-service stockbroker. The broker’s job description is pretty simple: help clients buy and sell securities. The more clients buy and sell, the more money the broker makes. At its core, the typical Wall Street firm is a giant sales machine and brokers are the cogs that make the machine work. If the brokers don’t sell, the entire machine grinds to a halt.
Some products sold by brokers come from the brokerage firm itself, while others are sold on behalf of third-parties. When you do a transaction with a broker, you pay a commission to the brokerage firm. Some of this money finds its way into the hands of your broker. The rest goes to cover other corporate expenses.
Brokerage firms also charge fees to third-parties who wish to sell products through the firm’s broker network. However, not all product companies are willing to pay these fees. The Vanguard Group, for example, will not pay to use a broker network. As a result, Vanguard funds do not typically show up on the “approved” list for many commission-based brokers.
Brokers at major Wall Street firms are generally well-informed. These firms produce excellent research and they typically offer a full line-up of products to fit their clients’ needs. However, if you are going to work with a full-service broker, you need to think carefully about the kind of advice you are likely to get. In particular, consider these three points:
1. The punchline of broker advice is often a sales pitch. Since they are trying to earn a commission, expect their advice to be geared that way.
2. Expect that the products you are pitched will be those that offer the broker or the brokerage firm the best payout. You can often find a similar or identical product elsewhere for less.
3. Remember, a broker is not a fiduciary. A fiduciary is required by law to put the interests of the client first. But this is impossible in a brokerage relationship. The broker represents her firm, not the client. This doesn’t mean the broker is going to rip you off, but it does suggest that broker has divided loyalties at best.
One final point: a good full-service broker isn’t cheap. Commissions to purchase individual stocks could run as high as $200 per trade depending on the trade size and the size of the account. The commission on other products could be as much as 5 percent of the overall transaction value. There may be other fees, also. For example, you may get charged a fee if your account doesn’t do enough trades or if your account balance falls below a certain threshold. As you shop for an advisor, make sure you ask your broker for a full schedule of fees.
Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes questions you may have concerning investments, taxes, retirement or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to email@example.com.
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