$10,000, Adviser Compensation, and a Five Minute Conversation

 In Advisers, Asset Allocation, Expectations, Fees, Financial Planning, Investments, Retirement

Let me say up front that I don’t like to do self-promotional blogs.  But I am going to do one anyway!  We are proud of how we help our clients.  It’s simple.  Our individual and employer clients pay us flat fees for guidance.  And we believe that how advisers are compensated matters – a lot. Check out this example to understand why

An employee at one of my employer clients called and asked about transferring his preexisting funds from another plan to his new plan, which is the one I work on.  The amount to transfer was significant, well into the six figures.  I would also characterize this client as financially aware.

His new employer is a smaller firm with a very low cost plan.  The employees’ fees are about .45% of their plan balance, which is much lower than industry averages.  They use an array of low-cost funds from Vanguard.  However, included in the .45% are record keeping and advisory fees.

I explained that I could help him do the transfer, however I also let him know that he could transfer the funds directly to a Vanguard IRA and not have to pay the additional record keeping and advisory fees in his plan.  That was it!  This took all of a minute or two.  While it could be more or less depending upon market returns, I estimate his total savings by avoiding these additional fees to be $10,000 over a ten year period!  I am sure this is money he would rather have for his Family and future, right?

In this case, I was free to provide guidance to this client without impacting my compensation.  I make no more money if he would have transferred his account to the plan.  As I mentioned, we charge our clients a flat fee.  We do not charge a fee as a percentage of plan assets.   If we did, I definitely would have an incentive to encourage him to transfer his funds to the plan, even though that would not have been in his best interest.

Or how might it have gone if I was a broker/dealer or sold managed investment programs?  I clearly would have had an incentive to make him aware of these options, right? And if he would have been interested I would have an opportunity for a nice commission or ongoing management fee.  Ka-ching!  Whether or not the client would have been interested in this case is not the point.   The issue is how my compensation could have affected my guidance.  Advisers will argue that the employee would benefit from being aware of these options.  But an employer-based retirement plan is not a place for an advisory firm to grow their individual book of business!

Do you work with a broker/dealer?  Or a firm that has other “options” for your funds?  Whether you are an employer or an individual consumer, understanding how your adviser’s compensation affects the type of guidance you (or your employees) receive is very smart!


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