You need to have a relationship with a fee-only financial advisor…
Have you ever gotten a phone call from a pitchy salesperson from a busy call center that went something like this:
“Mrs. Smith, your name came across my desk this morning, and I want to let you in on the ground floor of an opportunity. It’s an opportunity that only comes around once in a lifetime. I am only letting in a few of the savviest investors to take advantage of this company…
Our researchers have just today uncovered a company that we, at FUE, have found will likely be the next Microsoft. Act right now and you can get in at the ground floor.
They are already revolutionizing the way operating systems will behave in the future. It’s like getting property in the new world before Christopher Columbus even set sail. And, by the time the ship lands, it will be old news…history!
How about I put you down for 5,000 shares right now… I have several more calls to make before noon, and by then it will be too late to take advantage of this opportunity…”
This type of call is obviously an extremely pushy, boiler-room type of pitch. And you have likely been on the receiving end of these calls. Most of these boiler-rooms have fled the United States. But many savvy investors, like yourself, still find themselves on boiler room call sheets.
If you get one of these calls, my advice is to hang up the phone!
These commission-based representatives very likely do not have your best interest at heart when making these high-pressure pitches. They want to separate you from your hard-earned money and have long painted a black eye on the investment industry.
Seeking out a financial advisor that is compensated on a fee-only basis is likely to foster a better relationship.
Fee-Only Financial Advisors Are Incentivized to Grow Your Assets
Don’t be fooled!
All investment professionals are paid… no matter what they say!
When selecting a financial advisor, it is important to understand their incentives.
There are two main categories of compensation structures for financial advisors.
- Commission-based
- Fee-only
Commission Based Financial Advisors
Full-service brokers serve the interests of their brokerage house. Their master isn’t you; it is the firm they represent. They are incentivized to design your portfolio with what their firm is promoting . As with any commissioned sales representative, these reps earn a percentage of the sale that they close. For annuity products, this could be as high as 10% of the total transaction.
Fee-Only Financial Advisors
Alternatively, a fee-only financial advisor is paid a percentage of assets under management.
The primary incentive for a fee-only registered investment advisor is to retain and grow your assets under management. They make a living by directly serving the financial needs of their clients, not the financial needs of the firm they represent.
This is not to say that a financial advisor that earns his living by receiving commission isn’t capable of doing a tremendous job meeting their clients’ needs. After all, if they don’t also retain their clients, they won’t be able to sell them something in the future.
From our firm’s perspective, however, the incentives are in the wrong place. We feel it is in our clients’ best interest to have a clear understanding of the cost of the advice and counsel that our team provides.
Transparency is extremely important.
We won’t push a specific product or service because our firm has created a sales incentive. Our only incentives are to provide excellent service and grow your assets!
Fee-Only Financial Advisors Have No Incentive to Churn Your Account
A common malpractice amongst commission-based financial advisors is churning an investor’s account. And this is in large part because of the incentive structure that exists.
At its most basic level, the act of churning is excessively trading a client’s account with the sole purpose of generating commissions for the broker. When this type of trading is performed for that sole purpose, it is illegal.
Churning is tough to prove, but it isn’t necessarily as difficult to spot.
By continuously selling one investment to purchase another similar investment, the broker will generate commissions for himself at your expense. Additionally, this turnover could lead to tax liabilities that are not in your best interest.
Seek a Consultation
Unusual spikes in trading volume do not prove churning. If you notice that your discretionary account has had an increase in activity, ask for justification. Seek a consultation. If there is no real fundamental reason for this increase, you might want to get a fresh set of eyes on your portfolio.
Big Signing Bonus with Sales Quotas
Did you know that brokerage firms offer six figure signing bonuses to recruit brokers?
And these big bonuses typically have claw back provisions if the broker doesn’t meet a sales quota?
Well… they do!
And it can lead to financial ruin for clients of commission-based advisors.
Take a look at the case of James Madden, a former securities broker in Indiana.
He accepted an offer from Raymond James for a $150,000 signing bonus. This equated to twice his annual salary.
But there was a catch…
Every quarter that he didn’t meet his sales quota, he was required to pay back $7500 of that bonus. He had 7 kids in private school and college at the time.
Talk about pressure!
Six months into his tenure with the firm, he owed back $15,000 to Edward Jones. He was feeling the heat.
So, what did he do?
He started making unauthorized trades on his clients’ accounts to meet his quota.
Obviously, James should never have participated in this illegal practice. And he was fired by Raymond James, the firm made restitution, and his license was suspended. But you have to wonder…
Is this practice in the best interest of the investing public.
Incentives Matter
With a fee-only financial advisor, you avoid this incentive.
There is no reason to increase trading fees for the purpose of increasing commissions for the representative.
The only incentive a fee-only financial advisor has is to grow your funds in a responsible manner. As your total assets under management increase in value, so does the total compensation for the firm.
Dupree Financial Group, LLC operates on such a level fee compensation model. We do better when you do better.
The incentive is to do exactly what we fundamentally believe is in our clients’ best interests. You are our boss, not some firm.
We answer to you!
Fee-only Financial Advisors are Fiduciaries
Another huge benefit of working with a fee-only financial advisor is they act as fiduciaries.
A fiduciary duty means that, by law, they are required to put the interests of their clients first. Whereas, a commission-based advisor must only satisfy a suitability rule. The suitability rule only states that they must sell products that they believe suits their clients’ needs.
That is a very important distinction.
A fiduciary duty is the highest standard of financial care that an investment professional can provide. These advisors cannot put your money in any investment vehicle that remotely runs contrary to your needs, objectives, or risk tolerance.
At Dupree Financial Group, LLC, we are bound by this fiduciary duty.
Limit Conflicts of Interest with Your Financial Advisor
Another potential problem with a full-service brokerage firm is the potential for myriad conflicts of interest.
A brokerage firm can incentivize brokers to have a certain amount of increased trading activity by offering a bonus for selling shares in an equity that the firm is underwriting.
Wow, talk about incentive!
Believe it or not, analysts that work for the broker-dealer have major conflicts of interest as well. So, it could be important to have an unbiased second set of eyes providing its own research.
Brokerage Analysts: Conflicts of Interest
Recent testimony by the SEC has noted no fewer than four major conflicts of interest that might skew research analysts’ recommendations. These human beings are not immune to pressure that they face from their employers. And pressure most definitely exists within full-service brokerage firms.
First, the analyst’s firm may have underwritten the offering, or might seek to underwrite a future offering.
Secondly, firms that are compensated on a commission basis are incentivized to increase trading volume. Positive reports from analysts have a positive correlation with trading volume thus creating higher revenue for the brokerage.
Thirdly, the firm that employs the analyst might own a large position in the company that they are researching. This puts pressure on the analyst to provide upbeat recommendations.
And all of these are further supported by the analyst’s compensation. In many cases, the analyst’s bonus structure is inexorably linked to the profitability of the firm’s investment banking business.
Independent research is at the heart of everything we do at Dupree Financial Group, LLC. We are not paid by a third party to provide research. And we do not have an investment banking arm putting pressure on us to push a secondary offering on our clients.
Invest With Dupree Financial Group, LLC.
Unlike the traditional commission-based model, our fees are extremely transparent.
We have absolutely no incentive to churn your account, and only make moves when we have a fundamental reason for doing so. We seek investments that provide cash flow for our clients while providing opportunity for growth.
Unlike other firms, we never accept compensation other than the transparent fees that our clients pay to act as their fiduciary. This prevents most conflicts of interest from rearing their ugly head.
Research is at the heart of everything we do as registered investment advisors. It is what gives us the confidence to endure in any and all investment climates. And we are excited about the opportunities that the market is providing us today.
You owe it to yourself to get a no-obligation second set of eyes on your portfolio. It is always a good time to own value-oriented companies that provide solid cash flow and solid long-term growth prospects. Because of the recent downturn in the market, many such companies have become bargains.
Contact us today.