By Rick Ferri, CFA
Real investment advisers are rare. These are lone fiduciaries who earn a living by providing financial advice for an hourly or fixed-fee and have no conflicts of interest with how they are paid. The rest of the industry is faking it. These are people who encourage you to buy the products they’re paid a commission to sell and encourage you to hire their firm to manage your portfolio, while you pay them an ongoing asset under management (AUM) fee.
There are over one million people in the US who call themselves investment advisers, but strikingly few are paid solely for advice. Brokers from large Wall Street firms say they are advising you, yet that’s only within the realm of the products their company offers for commissions and fees. Many financial planners have a certificate hanging in their offices that says they plan for your future, but their actual job is to sell insurance, mutual funds, and portfolio management services for the companies they work for.
It’s hard to find an adviser who only advises and is paid only for the advice they give. If you don’t count all the people selling something, and only count those who are paid to provide information and recommendations with no conflict of interest, the number of fiduciary advisers drops to a tiny fraction of the industry. In fact, I doubt there are more than a couple of advice-only advisers within 100 miles of your home.
Why is this the case? Simple. It’s much more lucrative to advisers to sell products and AUM-based portfolio management services than to get paid an hourly fee for providing unbiased advice. I know this because I have 33 years in the adviser industry on three different sides.
My first 10 years was as a broker for two different Wall Street firms. Brokers take home a percentage of their production, which is how much money they take in from product sales. The size office they’re assigned is also a factor in their production, as is the title they’re allowed to use. Sell more, get more.
That didn’t suit me, so I founded a low-fee investment management company in 1999 that I ran for nearly two decades. Clients put their money under management with my firm and paid ongoing AUM fees. This eliminated commission sales but didn’t eliminate my recommendation to hire our company and pay me each quarter.
Now I’m paid to give advice––only advice––and it’s a different world. I don’t have to sell anything or bring in assets under management. I can advise people based on my experience and knowledge without being encumbered with conflicts of interest. I’m paid like you would pay your CPA or attorney.
It’s an odd change because I found myself telling clients not to do many things I may have said to do in the past. It’s not that I was dishonest in the past, but it became crystal clear that getting paid commissions and AUM fees absolutely influenced what I said. Most advisers selling products and AUM services will deny it, but it’s true for them also. There is no way around this human bias.
Where do you find an hourly adviser? Here are a few ideas. Try the Garrett Planning Network, www.garrettplanningnetwork.com. It’s a small organization of advisers who do advice-only work. You could also try NAPFA, www.napfa.org, but you’ll have to search hard because there are a lot of AUM advisers there. Lastly, visit XY Planning Network, www.xyplanningnetwork.com. Again, you’ll have to search hard because a lot of those advisers want other than advice fees.