What is Fee-Only Investing?
nVest Advisors, LLC is a fee-based registered investment advisor. So what does that mean, exactly? How does that differ, you may ask, from my current stockbroker or investment manager?
Actually, we think the difference matters greatly. Here’s how:
Financial advisors have two basic ways to be paid for their services. The first and most common way is by commission: you buy a financial product from them, they earn compensation for the transaction (usually a % of the dollar amount of the transaction). Whether they serve your account needs or not after the sale is largely irrelevant to their income. And although there are obviously very good agents and advisors out there working on commission, as an industry, commission-based financial professionals are always paid to gather and move money, not to grow it.
The other kind of business model is a fee-for-service agreement with you, the client. With a fee-based advisor, you pay your financial professional a fee on a periodic basis, for him or her to manage and grow your assets. In most cases, you pay nothing for the actual transactions.
We believe the fee-only model is the best of most clients for the following reasons:
You and your advisor are on the same team.
If you pay your advisor, let’s say for purposes of example, 1% per year of your total account value, the advisor who earns a fee based on the balance of your account has the same incentive you do: to grow your account! If your advisor does a good job and market conditions are favorable, and your account grows this year, he or she will earn a larger fee (because they earn 1% of a larger balance). However, if your account value declines, your advisor takes a pay cut.
So instead of being motivated to move you in and out of products in order to generate transaction commissions, the advisor is paid to manage and grow the account you have. That changes the mentality of the advisor completely. We no longer feel any incentive to push you into a “hot new” product, and investments with high annual fees now hurt us as much as they do you.
There are fewer conflicts of interest in fee-based advising.
Because our revenue comes solely from you, our client, and not any financial company whose products we use, fee-based advisors have little or no personal financial incentive to use one company’s products over another. This gives us the objectivity to select the investments we believe will do the best job of growing the account, rather than which one pays us the best commission.
In fact, fee-based advisors are held to higher standards of client care than commission advisors. Government regulators are trying to fix that, with changes like the new Department of Labor fiduciary rule for retirement accounts, but many companies in the commission-paid part of our industry are aggressively resisting being forced to always do what’s in your best interests.
The same may not be true of a commissioned agent or advisor, many of whom are employees and are “captive” to their company, or else may be motivated by higher commissions or company pressure to sell one financial product over another. In fact, it was this kind of pressure that caused our CEO, Jeremy Torgerson, to leave his first financial employer and become an independent advisor very early in his career.
Conflicts of interest in our business are supposed to be disclosed to you, the client, before you sign anything. And you have every right to know how your agent or advisor is paid, how much, and if there are less expensive alternative products available. Make sure you ask and are comfortable with the objectivity of the advice you’re receiving before you sign anything.
A fee-based advisor generally uses less expensive investments.
Make no mistake: whether you can clearly see a sales charge or trading commission on your account, you as the client are paying for the products you own. Commissions have to be taken from somewhere. In an individual stock or bond transaction, these charges are fairly transparent. But what about in a mutual fund or a variable annuity? There are up-front or contingent deferred sales charges, 12b-1 fees, management fees, and more. Do you know what you own? And do you know what you are paying for what you own? Most clients don’t. And many agents and brokers don’t do a good job of explaining the fees. That’s where the cost to you, as the client, gets much harder to determine.
Because fee-only or fee-based advisors earn no product commissions, we can use versions of the same quality investments that carry no commissions, surrender charges, or 12b-1 expenses. That means you can get the same quality investments from a fee-only advisor, without the added expense of retail commissions embedded in them.
Eliminating commissions lets your advisor work more proactively.
Not having to pay commissions every time you make an investment change allows your fee-based advisor to more flexibly and regularly respond to broad changes in the economy. While we here at nVest Advisors still believe in taking a long-term view on most of our client’s investments, there are times when market conditions or events in your life will require adjustments in your strategy.
Fee-based advisors are also freed up to use investments that are “best in class” for each part of your allocation strategy. In traditional commission-based accounts, the ethical advisor will try to limit the number of fund companies you invest with, to give you lower investment costs by hitting that company’s breakpoints (essentially volume discounts). Typically the more money you invest with the same company, the lower commission rate you pay. Fee-based advisors and their clients pay no commissions, so we don’t have to limit the number of companies we use in an account, and instead hire a company only for the parts of your strategy that they do particularly well.
Is fee-based investing right for everyone?
Not necessarily. If you buy an investment (say, a company stock or a government bond) and hold it for long periods of time, paying the commission when you buy and sell may be the more cost-effective way to go.
Also, you are paying a fee for advice and professional management of your money. If you are a successful “do it yourself”-er, paying a low commission at a discount brokerage firm may be the best option.
But if you have what we call “serious money” that will spend a long time invested but needs to be professionally managed: your personal retirement account, your company’s 401k plan, your trust, etc., fee-based account management may prove to be not only a cost-effective fit, but a strong philosophical one, as well.
Want to see if your needs are a good fit for fee-based advising?
Nothing on a website will replace an individual assessment of your personal needs and preferences. At nVest Advisors, we know you’ll need to weigh the pros and cons of making a change. That’s why we offer a no-pressure, no-obligation consultation (either in person, on the phone, or online). Just so you can see if the way we think, and the way we do business makes sense for you.