Police officers are like most people and have no idea how much they pay for investment, insurance, or retirement advice. A lot of people mistakenly assume they receive free advice. Some advisors do not explain their fees and many consumers do not take the time to ask. People in law enforcement, like most people, are usually shocked when I explain how much they’ve been paying in commissions or fees.
There are many different ways advisors are paid in the financial services industry. For the sake of this brief article, I will broadly categorize all of the fee structures into three categories. They are Commissions, Fee-Only and Fee Based.
The traditional and most common way fees are charged is through commissions. Commissions are typically paid when an investment or insurance product is either bought or sold. Commission based advisors do not get paid unless you buy or sell something. If you believe you do not pay fees to your insurance or investment advisor, than you most likely work with a commissioned advisor that receives a percentage of each transaction.
The Fee Only model is the newest payment structure on the block. There are different ways Fee-Only advisors are paid. Fees may come from a flat annual retainer, by the hour, or a flat annual fee based on a percentage of your investment assets. Fee-only advisors do not receive any commissions or kickbacks from the investment products they recommend. Fee-Only advisors tend to be more comprehensive and objective because they are paid the same regardless of which investments you choose.
Fee Based advisors are a hybrid of the Commission and Fee-Only model. Fee Based advisors are commonly mistaken for Fee-Only, however, there is a distinct difference between the two. The Fee Based advisor receives commissions for products sold, but also charges an additional fee for advice. In contrast, Fee-Only advisors don’t receive any compensation from insurance or investment products sales.
So which is best?
As objective as I’ve tried to be in this article, I’m a Fee-Only advisor so I’m obviously biased. As in any industry there are good and bad people in each of the categories. Your job is to understand exactly what you’re paying and what you get in exchange for that fee. Each of the three fee structures has advantages and disadvantages to both the advisor and the consumer. There is not enough space in this article to cover all the pros and cons, but I encourage you to learn more and then choose an advisor with a fee structure that is most likely to put your interests first.
Photo Credit: “Money” by TW Collins as Creative Commons on Flickr.com