[00:00:00] Speaker A: In this episode, we talk about the three different types of financial advisors and why understanding how each of these advisors are paid can give you a better expectation for the type of relationship you'll have with them. Let's get started.
[00:00:11] Speaker B: Let's get some money from new money new problems. It's the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
Negotiating compensation, purchasing your first investment property, helping your family with money. The highs and lows of, uh, entrepreneurship. New money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison, and this is the New Money New Problems podcast.
Hello.
[00:00:50] Speaker A: My name is Brenton Harrison of New Money new problems and your host for the new Money New Problems podcast. In last week's episode, I told you we're going to be interspersing episodes about mortgages and homeownership with some other topics that we had in mind. One of those topics is getting into the details of financial advisors, the structures of different advisory practices, how we get paid, why we set our prices the way we do. And I am going to kind of drop these episodes amongst each other. So we'll do an episode where we talk about homeownership. We'll do an episode where we talk about being a financial advisor or a client of an advisor. And last week, um, as I was getting ready to post the episode on mortgages, I put up a post on social media where I'd explain why my wife and I choose to take our son to Huntsville, Alabama, for his dental appointments. We live in Nashville. It's about an hour and 45 minutes from Huntsville. It's 2 hours from the dental practice that we go to, and I had shared that we pay extra, both in gas, in taking time off work, in the money that we spend while we're in Huntsville to take our son to the dentist because of the comfortability we have with our friend Marcus Moss, who is the dentist that our son sees. That got me thinking about the things that people pay for that may be way more than what they have to pay, but they choose to pay because of some reason or another, and that connects very closely to what it means to pay a financial advisor. Over the course of my career, I have shifted, uh, from one type of advisor, or I would even say advisor, I would say registered representative to another type of advisor. As my practice has grown, and many people that I come across when it comes to their experiences with financial advisors, especially first generation, minority, high income earners, they've had at least one bad one where they were sold something that they didn't understand, or they started a relationship with an advisor expecting to get one thing and they ended up getting another. In most cases, they're getting less facetime than they expected. And when I dig into the history of that relationship, what I have found, including in my own career, is that most of the time, when there is a disconnect between what the client expects and what the advisor is offering, it often starts with a lack of understanding of how that financial advisor operates, how they're licensed, and how they get paid. And to be clear, the responsibility of making sure the structure of that relationship is understood lies on the back of the advisor. But I can tell you, even myself over the years, we, and I have done a terrible job with that at times. So I wanted to take this episode to kind of walk through the different types of advisors, how they're paid, so that when you're engaging with one, you have a better expectation of what you'll receive as their client. So let's get into it. In my opinion, for all the different types of names that you hear, investment advisor, representative, registered representative, financial advisor, financial consultant, there are really three types of financial advisors. There are commissionable advisors, and depending on how they're licensed, they may not even be able to call themselves advisors. They may instead call themselves registered representatives. The second type of advisor is a fee based advisor, and the last type of advisor is a fee only advisor. So let's start with a commissionable advisor and go through not only how they're paid, but some of the licenses they have that may clue you into the type of relationship that you would have with them. A commissionable advisor is someone who, based on their licenses, can only be paid by offering products and services that pay them a commission. An example of some of these products would be things like term and permanent life insurance, disability insurance, long term care insurance. On the investment side of the fence, it would be something like a mutual fund that has a load, or a commission or something like a variable annuity. Now, in some cases, if you're offering certain products, that commission that's paid to the advisor does not come from your money. As an example, let's say that you get a term life insurance policy and you're paying $1,000 for it. Well, by getting that policy that cost you $1,000, the advisor that sold it to you may get a $500 commission from the insurance company, but that commission does not affect your money. It doesn't come from your money. It's offered by the insurance company. There are other scenarios, however, where that commission that's paid to them actually does come from your money. For example, if you have $1,000 that you were going to put into a mutual fund that had a load attached of 5% load, just another word for commission, then you would put $1,000 in, and 5% of that $1,000, in this case, $50, would go to the advisor as their commission. So the only money that goes into the actual investment is the remaining $950. Their commission actually comes out of your money. And when it comes to the type of licenses that you would have for an advisor who would be offering these type of products, you would typically see something that will be called a series six and also a series 63 license in addition to insurance licenses. So a series six and a series 63, those are federal licenses that allow you to offer products like those mutual funds, like those variable annuities that pay a commission, whereas insurance is regulated by states. So if you were going to, for example, be working with somebody who's offering you life insurance, they would have to have their insurance license for the state of Tennessee in my example, because it's a state regulated entity.
So if you're looking on screen, we're actually on the FINRA broker check, and I'm going to check my name. You can type in the individual I've typed in Brenson Harrison, and it will pull up my record. It'll tell you, if you click on more details, a, uh, wealth of information about me as an advisor, and it will tell you the exams that I passed. So, for example, if you go to the exams, you will see, in terms of the two that we just mentioned, a series six license that I took way back in 2009, and a series 63 license that I took in January of 2010. And if these were the only two licenses that you saw, in addition to being able to maybe check with that state's insurance department to see if they can offer life insurance or health insurance and the like, then that would likely tell you that the only way I can get paid is by offering commissionable type products, which is very different than that being one of the ways that you can get paid. If these are the only licenses that this person has, it basically is telling you that no matter how many times I meet with this person, the only way that they're compensated is if there is a new product that pays them a commission while I'm working with them. And in terms of where these type of advisors are often found not the only type of advisor that are at these types of shops, but you often see this at a more insurance focused shop, a place like a mass mutual, a place like a northwestern mutual, wonderful companies, and I know wonderful advisors at each of them. And there are people who are licensed to do all type of planning at these firms. But when you have a shop that's more insurance focused, you're more likely to come across an advisor who early in their career only has these types of licenses. And that means that no matter what type of relationship you are proposed on the front end, hey, we're going to meet three or four times a year, and I'm going to do full service planning, and I'm going to give you all this wonderful advice and all of these tips that are going to help you financially. They may be willing to do so, but understand that the only way that they can feed themselves and pay themselves is to continuously find new products and new services to offer. And even if they have clients with whom they work regularly, if that client is not continuously purchasing new products, that advisor is going to be forced to go find more and more people to whom they can offer their products to subsidize the non paying clients. And if you didn't do a good job as an advisor, and oftentimes I didn't, uh, of explaining to a person, hey, I understand that I've been meeting with you for five years, but for the last four, that's just because I was trying to be helpful. It wasn't because you were still working with me as a paying client, then it's on you as an advisor to say it, but because you didn't, you leave a client that's left in the wind. When in reality, based on the way that advisor is licensed, they do the best that they can at the point and time of sale to make sure that your finances are in order and whatever they're recommending is the right thing for you. But moving forward, there should not be the expectation that they're giving you continuous financial advice. The next type of financial advisor is actually the type of financial advisor that I am, which is a fee based advisor. And fee based is actually a legal term based on the type of products and services that you offer. You cannot present yourself as a fee only advisor, which is the last advisor that we'll discuss, when in reality you have at least the option of offering products that could pay you a commission. So whether or not you actually offer those products, if you even have the capacity to, you're not able to position yourself or put yourself out as a fee only advisor, you have to tell the clients the distinction of being a fee based advisor. And if you look at a fee based advisor, they are also going to likely be regulated by FINRA. So I am a fee based advisor. That's why you're able to go to my FINRA broker check. And on my FINRA broker check, you will see not just the six and 63 licenses, you'll also see a state securities license called a series 65. And a series 65 is one of the licenses that you'll see from a fee based advisor that keys you into the different types of ways that they can get paid. You see, a series 65 license is a license that gives you the ability to charge a fee to manage people's investments. So if we're drawing a line between the two so you can understand the difference, a commission is something that a person or a company pays to the advisor at the front end of a transaction. And while they may get small renewals, it's essentially a one time deal, both in terms of when the advisor is paid the bulk of the money and also their responsibility to that client. Moving forward. If I offer you something that I get a commission for, it's not something where I have to continuously meet with you moving forward to make sure that that remains appropriate. It just has to be appropriate at the time that I offered it to you. If you're doing something that pays you a fee, like managing someone's investments, you're getting an ongoing fee to manage that person's investments. And that means that you have to continuously make sure that that investment is appropriate. That gets into the first mention of something called the fiduciary standard, which is something that we'll talk about in a later episode. So that's where the ability to charge a fee comes into play. But the fact that a person is fee based means that they are still licensed and affiliated with an entity. In most cases, that would be a broker dealer. And with that affiliation, it still gives them the ability to offer things like that term life insurance, or the disability insurance, or the variable annuities, or those things that continue to offer them a commission. When we talk in later episodes about why I've decided to be a fee based advisor, I'll explain to you why I chose fee based instead of fee only in terms of the balance and the future of our firm and what I think is best. When you have a fee based advisor, you need to make sure that you have an understanding of how they're paid and they should be completely willing to be transparent about how they're paid, what they're paid, and from which entity, because there can be an interplay. When you have that type of relationship where they're offering you one thing that does pay them a commission, but they also have a part of their service offerings that you are engaged in that pays them a fee. For example, if I have a client that we're working with and they have term life insurance, well, I get a commission from them getting that term life insurance. But if I'm also charging them a fee for financial planning, then I get a fee for financial planning where I have to make sure that I meet that continuous standard of meeting with them on a regular basis. So when you're interviewing an advisor and you're doing your background research on them and you see that they're able to offer commissionable products, and you're also able to work with them in a way that they charge a fee, then you need to make sure you have a crystal clear understanding of how you're engaging with them. Am I just getting something from you that pays you a commission and then we're not meeting again regularly? Am I doing something that just pays you a fee and we are going to be meeting on a continuous basis, or am I doing some combination of the two? What is our relationship going to look like moving forward? And let the advisor explain to you how that engagement will work and what that expectation should be on both sides of the table.
[00:13:18] Speaker C: This is the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen. We'll be right back.
[00:13:36] Speaker B: Are you wondering what new money problems you might be overlooking in your financial life? If so, we've got great news. We've crafted the new money new problems gap finder to identify potential weaknesses in your finances in areas ranging from budgeting, investments, insurance, and even the threat your extended family's finances could pose to your household. Please head to newmoneynewproblems.com, um, Gapfinder. To complete it today. Again, that's newmoneynewproblems.com. Gapfinder. To take the assessment.
[00:14:15] Speaker C: You'Re listening to the new Money New problems podcast. Subscribe
[email protected]. Welcome back.
[00:14:25] Speaker A: All right, let's bring this thing home with the third type of financial advisor, a fee only advisor. A, uh, fee only advisor is exactly how it sounds. It's a financial advisor that is only engaging with clients in a relationship that charges them a fee, and they're not offering any type of products as an advisor that would give them a commission. And in terms of how these advisors are regulated, there's going to be a difference between where you would check up on an advisor who is fee based or commissionable as compared to someone who is fee only. A fee based or commissionable advisor is someone who is going to be likely regulated by FINRA, whereas a fee only advisor, because it doesn't touch on the type of products that FINRA regulates, you're going to be regulated as a fee only advisor by some combination of the securities and Exchange Commission, your state in which you do business, or a combination of the two. So just like FINRA has a broker check, I have up on screen the securities and Exchange Commission, and you can go to the investment advisor public disclosure website. And if you have a fee only advisor that you're looking into, you can type their name and their location into this registry, and you'll be able to pull up the same bits of information like you can see on my FINRA broker check. You'll be able to see their years of experience, the firms with which they're affiliated, the exams that they've passed, their state licenses. You can also see any disclosures, we didn't mention that before, but if this person has a publicly filed complaint from a client, or if they have any marks on their compliance record, you'll be able to see this. And that's something that people often will look into when they're checking an advisor. They'll go to their FINRA check, or they'll go to the securities and Exchange Commission to make sure there's not any adverse marks on this person's report. So now that we know the three, let's walk through this just like we did with the other two, so you can have an idea of where this puts you in terms of your search for an advisor. If I'm someone who's getting myself off the ground and I have the ability to start to do some things, but I don't yet have the discretionary income to pay for a financial advisor. I may want a professional who can put their eyes on my finances, but I may not be able to pay them a fee that's ongoing or a substantive fee like what I would find with a fee based or a fee only advisor. So I may be attracted to somebody who's willing to sit down with me and go through my finances and not charge me a fee. But in exchange, that person is going to have the expectation that I might buy my term life insurance or my disability insurance, or I might get a mutual fund and pay them a commission while I'm working with them, where if I've outgrown the model of, hey, can you put your eyes on this? But I don't need much going forward, I might be disappointed by what I have with a commissionable advisor because they do not have the ability to continue to meet with me if I'm not buying new products from them. So, again, in terms of the expectations that we have going into relationships, a commissionable advisor can be great for a young couple who's just getting started, a growing family who doesn't have the ability to pay an ongoing fee, because, hey, maybe they can get some good advice. They actually needed that insurance that that advisor might have been offering to help with their growing family. So it gives them that access without there being the expectation of a fee on top of it that they can't afford. If I'm looking at a fee based advisor, like a Brenton Harrison, then I need to, if I'm engaging with him, have an understanding of how he's operating in terms of our relationship. And there are people that we work with in a limited capacity where we are only giving them that life insurance, disability insurance, long term care insurance that we receive a commission for. But it's on us as an advisor to make sure that that person understands this is not recurring revenue to us as a firm. This is not us operating in the fiduciary standard, which is what we'll talk about in future episodes. So I just want to make sure that you understand that moving forward, this is not an ongoing relationship. We're putting this product or service in place, and after it's put in place, then that's where the relationship ends from a client perspective. Whereas if there's someone who has a combination of the two, then we would explain to them the different interplay between those resources and what it means for the future of our relationship. If you have a fee only advisor, then that would tell you that this person is going to be there to help you with the planning. You're going to pay a fee for that planning. So just like with a fee based advisor, with these last two types, there's going to be the expectation that if you're engaging with planning, that you're paying a fee to do so. And we will talk in the future about how those advisors set those fees. But if you're going into a fee only relationship with the expectation that there's going to be some things that they can implement for you. Like those insurances, they are fee only. They cannot offer you things like life insurance and disability insurance, so they may be well versed in it. They can make recommendations on where you should go to purchase and what you can purchase. But there are elements to that engagement where they have intentionally set that layer of separation as an advisor to make sure that anything they recommend that would typically pay a commission, the client has to secure that outside of that agreement. So this may have been a little bit of a boring episode for some of you if you're not interested in engaging with an advisor. But as an advisor who spends a lot of time in the minority community and has watched over the years as more and more people around me have said, oh, I had a terrible experience with this financial advisor or that financial advisor, it's incumbent upon me to make sure you have an understanding of how a person gets paid, and having that understanding could make sure that you get what you need when you need it, but you're not in a position where you feel like you've been left out in the cold because of either a lack of understanding or poor communication from that advisor that would have been helpful on the front end. Next week, we'll get back into our series on homeownership, and I hope to see you then.
[00:20:02] Speaker B: From new money new problems. This was the new Money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
