{"id":133,"date":"2008-07-18T06:42:45","date_gmt":"2008-07-18T13:42:45","guid":{"rendered":"http:\/\/financegourmet.com\/blog\/investing\/a-financial-advisor-makes-money\/"},"modified":"2008-07-18T06:42:45","modified_gmt":"2008-07-18T13:42:45","slug":"a-financial-advisor-makes-money","status":"publish","type":"post","link":"https:\/\/financegourmet.com\/blog\/investing\/a-financial-advisor-makes-money\/","title":{"rendered":"A Financial Advisor Makes Money"},"content":{"rendered":"

Today\u2019s inspiration comes courtesy of All Financial Matters<\/a> (a solid blog with good hard numbers data) who notes that a Money Magazine article called \u201cThe Mole\u201d discusses how just because a financial advisor says he puts his clients first doesn\u2019t mean he does.\u00a0 Really?\u00a0 Did I miss something?\u00a0 If it says \u201cI put my clients first\u201d on an attorney\u2019s website does that mean that he does, or does it depend on the attorney?\u00a0 Are there doctors who over bill your insurance company to boost their income?\u00a0 Does a waiter ever suggest a more expensive wine to increase his tip?\u00a0 I\u2019m shocked, shocked, to find out there is gambling going on in here!<\/em><\/p>\n

All of this, of course, is why you need a good trusted financial advisor in the first place, but that is not why we come here today.\u00a0 I want to show you something from \u201cbehind the scenes\u201d as the Mole says.<\/p>\n

Financial Advisors and Commissions<\/h3>\n

Let\u2019s make up a fake client with a $500,000 account to be invested.\u00a0 Let\u2019s ignore all taxes and legal implications for the sake of simplicity and concentrate on commissions.\u00a0 We\u2019ll also assume that the account value stays the same over the years for simplicity.\u00a0 Do realize though that as your account value changes the fees would change too.\u00a0 (These are only the fees from the advisor side.\u00a0 He doesn\u2019t get any of the other fees that you might pay; they go to someone else.)<\/p>\n

Option 1: Wrap Account or Fee Account<\/h4>\n

The standard wrap account charges the client a 1% annual fee to manage their funds.\u00a0 The firm or advisor eats all the trading costs.<\/p>\n

One Year Fee = $5,000<\/p>\n

Continuing Fee Each Year = $5,000<\/p>\n

Fee over 10 years = $50,000<\/p>\n

Option 2: Front-Load Mutual Funds (All one fund family)<\/h4>\n

Loaded mutual funds take a big knock because of their highest fee (usually around 5.75%) but that fee goes down the more you invest.\u00a0 The average mutual fund family charges around 2% for amounts over $500,000.\u00a0 Your advisor usually also receives a 0.25% fee called a trail to the \u201cinsiders\u201d.\u00a0 You\u2019ll see it on your prospectus as a 12b-1 fee.<\/p>\n

One Year Fee = $10,000 (Load)<\/p>\n

Continuing Fee Each Year = $1,250<\/p>\n

Fee over 10 years = $22,500<\/p>\n

Option 3: Variable Annuity Suze Orman (and everyone financial writer) Nightmare<\/h4>\n

Variable annuities are always said to have the highest commissions.\u00a0 That is only sort of true.\u00a0 Most variable annuities offer different payout options including all the payout in one year or a smaller first year payout with an ongoing payout.\u00a0 The financial press always talks about the HUGE COMMISSIONS<\/strong> these products have, so we\u2019ll play their game and go with the big up front payout.\u00a0 The up-front varies, but on regular products from the big companies it is around 7% to 8%.\u00a0 You\u2019ll hear about higher ones, but they aren\u2019t the usual products and may not even be approved to sell by lots of firms.<\/p>\n

One Year Fee = $40,000<\/p>\n

Fee over 10 years = $40,000<\/p>\n

Payouts<\/h3>\n

There are other options, but we\u2019ll stick with these to make things easy.\u00a0 Now, before you get excited, keep in mind that your advisor doesn\u2019t get to keep all of this money.\u00a0 Every financial advisor gets a little bit different deal, usually depending on who he or she works for, and how much they produce (sell).\u00a0 But, this gives you a ballpark idea.<\/p>\n

A financial advisor who works for a company that pays for expenses like rent, utilities, staff, and so on generally gets something between a 40% payout and a 60% payout.\u00a0 A payout is how much the advisor gets from the commission he generates.\u00a0 So, for easy math let\u2019s say the advisor gets a 50% payout which means if he generates $10,000 in commissions, then he gets paid $5,000 and his firm keeps $5,000.\u00a0 With me so far?\u00a0 Good.<\/p>\n

An independent advisor gets a higher payout but has to pay all of his expenses including staff benefits and so on.\u00a0 We\u2019ll stick with the \u201chouse\u201d guy for now.<\/p>\n

So in our above examples, our advisor makes $2,500 the first year and $2,500 every year after that off of Option 1.\u00a0 He makes $11,250 the first year and $1,250 every year after for Option 2, and he makes $40,000 the first year and nothing after that on Option 3.\u00a0 Notice how Option 1 and Option 3 actually make the advisor around the same amount of money over the long run<\/strong>.\u00a0 This isn\u2019t actually true.\u00a0 If your advisor is making you even 8% return on your investment then the Option 1 numbers go up and up.\u00a0 After 5 years the account would be worth over $700,000 (now getting $7,000 per year in fees) and after 10 years it is over a $1 million ($10,000 per year in fees!)<\/p>\n

That is why a financial advisor who \u201cscrews\u201d you into a variable annuity may not only not be a good advisor for you, but may not be good at his own money either.\u00a0 Of course, this would help the advisor meet short term goals, but he has basically agreed to service your account for free over the life of your annuity.<\/p>\n

In fact, the advisor selling you those loaded mutual funds is probably giving you the cheapest long-term option (he isn\u2019t lying when he says that.)<\/p>\n

Do It Yourself<\/h3>\n

As with everything, everywhere, it is cheaper to do it by yourself.\u00a0 Remodeling your kitchen?\u00a0 Save thousands doing it yourself.\u00a0 Oil Change?\u00a0 Cheaper if you do it yourself.\u00a0 Brain surgery?\u00a0 Good luck, but probably way cheaper if you do it yourself.<\/p>\n

Your investments are no different.\u00a0 Of course, if you don\u2019t know anything about tools and electricity and so on, maybe it is still best for you to hire someone to remodel your kitchen.\u00a0 He will make money when you do.\u00a0 If you don\u2019t know anything about investing and managing your money maybe you should hire someone to do it.\u00a0 He will make money when you do.<\/p>\n

Annuities and Insurance Usually Suck as Investments<\/h3>\n

Don\u2019t get me wrong, I’m not looking to defend annuities as investments.\u00a0 The vast majority of them are terrible investments for most people and whole life insurance is even worse.\u00a0 However, there are people for whom they make perfect sense.\u00a0 I deal everyday with people who are retiring from a company where they spent 30 or 40 years.\u00a0 They have a 401(k) balance (thanks to matching) of around $300,000 and a pension where they can get a one-time payout of $400,000 or a certain number of dollars per year for life.\u00a0 But, that number goes down if your spouse gets paid for life after you die.\u00a0 Also, your kids get nothing if you and your spouse die after just two years!\u00a0 On the other hand, you don’t want to run out of money before you die.\u00a0 These are tough questions when it is your money, and your whole life, and not just an exercise on paper.<\/p>\n

For these people, annuities sometimes make sense because they can get more per month than they could with including their spouse on the pension, and their heirs will get the remaining balance if they die early, and if they live a long time, the annuity will pay for life.\u00a0 Yes, I will get a commission for selling them that product, but I ask you, whole has the colder heart here?\u00a0 Me, who sells them a product that meets all their needs and keeps them from ever having to stare at the T.V. and worry if they will run out of money because of the economy, or the person who says do it yourself, you big baby.\u00a0 Look at these numbers in black in white.\u00a0 What’s wrong with you?\u00a0 Don’t you know you are paying for that help?<\/p>\n

Rip-Off Cliche<\/h3>\n

Seriously, is there no other way to rip off financial planning clients than to sell them a variable annuity?\u00a0 It seems that every time a financial “insider” or “investigator” runs out of ideas they write a column about variable annuities and trot out the famed widowed-orphaned-school teacher who was sold variable annuities with her tiny pension.\u00a0 There are TONS of ways you can get ripped off including plenty of do it yourself ways.\u00a0 Don’t be lulled into security because you aren’t getting an annuity.<\/p>\n

Technorati Tags: e annuities,investing,pension,fees,commisions<\/div>\n
BuzzNet Tags: e annuities<\/a>,investing<\/a>,pension<\/a>,fees<\/a>,commisions<\/a><\/div>\n","protected":false},"excerpt":{"rendered":"

Today\u2019s inspiration comes courtesy of All Financial Matters (a solid blog with good hard numbers data) who notes that a Money Magazine article called \u201cThe Mole\u201d discusses how just because a financial advisor says he puts his clients first doesn\u2019t mean he does.\u00a0 Really?\u00a0 Did I miss something?\u00a0 If it says \u201cI put my clients first\u201d on an attorney\u2019s website does that mean that he does, or does it depend on the attorney?\u00a0 Are there doctors who over bill your insurance company to boost their income?\u00a0 Does a waiter ever suggest a more expensive wine to increase his tip?\u00a0 I\u2019m shocked, shocked, to find out there is gambling going on in here! All of this, of course, is why you need a good trusted financial advisor in the first place, but that is not why we come here today.\u00a0 I want to show you something from \u201cbehind the scenes\u201d as the Mole says. Financial Advisors and Commissions Let\u2019s make up a fake client with a $500,000 account to be invested.\u00a0 Let\u2019s ignore all taxes and legal implications for the sake of simplicity and concentrate on commissions.\u00a0 We\u2019ll also assume that the account value stays the same over the years for … <\/p>\n

Read More<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[41,116,205,661,391,573],"class_list":["post-133","post","type-post","status-publish","format-standard","hentry","category-investing","tag-annuities","tag-commisions","tag-fees","tag-investing","tag-pension","tag-variable-annuities","no-featured-image-padding"],"_links":{"self":[{"href":"https:\/\/financegourmet.com\/blog\/wp-json\/wp\/v2\/posts\/133","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/financegourmet.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/financegourmet.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/financegourmet.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/financegourmet.com\/blog\/wp-json\/wp\/v2\/comments?post=133"}],"version-history":[{"count":0,"href":"https:\/\/financegourmet.com\/blog\/wp-json\/wp\/v2\/posts\/133\/revisions"}],"wp:attachment":[{"href":"https:\/\/financegourmet.com\/blog\/wp-json\/wp\/v2\/media?parent=133"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/financegourmet.com\/blog\/wp-json\/wp\/v2\/categories?post=133"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/financegourmet.com\/blog\/wp-json\/wp\/v2\/tags?post=133"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}