[00:00:00] Speaker A: When you google financial advisors online, you see a bunch of stuff about fee based versus fee only advisors, and also this weird, mysterious term called fiduciary. In this episode, we break down what all these terms mean, how they impact your relationship with your advisor, and we even share why we've decided on the structure that we operate at our particular firm. Let's get started.
[00:00:22] 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 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.
[00:01:01] Speaker A: My name is Brenton Harrison of New Money new problems, and your host for the New Money New Problems podcast. In this episode, we are going back to the well of, uh, financial advisors, and we're doing kind of a follow up to the episode we did on the three types of financial advisors. And in that episode, I broke down the difference between what you have as a registered rep, a, uh, financial advisor that's a fee based financial advisor, and a financial advisor that is a fee only financial advisor. And I shared that while over the course of that person's career, I would definitely recommend that they continue to get licensed and add to their abilities. It's not necessarily a bad thing for a person to work with a registered representative. This is someone who might be more appealing to a young family who doesn't have the ability to pay for a fee, in terms of an annual fee, to work with an advisor. Maybe they don't have any assets that that advisor could manage, but they do have certain needs, like some of those insurances, as we discussed. And in those cases, a registered representative may offer a real opportunity for that family to get some advice, limited as it may be in terms of the length of the engagement. But throughout the course of that process of getting the insurance, that registered representative can look at what they have, determine if there are any steps that need to be made. That family just needs to have the understanding that once that product is put in place, that representative's responsibility to keep up with those clients financial picture has ended. Now, uh, as an advisor progresses and as the depth of the advice that you're looking for progresses, you now go into the realm of having an engagement with an advisor where you are looking for something that's more of an ongoing relationship. Well, now we're in the realm of deciding between a fee based or a fee only advisor. As a recap, a fee based advisor is someone who has the licenses and the abilities to offer certain products and services from which they receive a commission, just like you find with registered representatives, but just like you find with fee only advisors, they also have the ability to charge for things like annual planning or charging to manage assets that a client might invest with them. A, uh, fee only advisor is a person, on the other hand, who has consciously decided to separate themselves from all products that can pay them a commission and from the fee only advisors, uh, that I associate with. And I have plenty of friends who are on both sides of this equation. Many of them feel like it is the best way to make sure that in terms of their morality, in terms of the transparency with their clients, in terms of making sure that they are only doing what they feel is best for their clients, it's the right way to go. Right. I should not even give myself the option of being tempted to offer my clients something that I'm going to get a commission for. They want to always be able to sit in front of the client and say that they only receive a fee by operating in a fiduciary capacity. And I bring up fiduciary capacity for the first time because it's a term that you might have heard about as it pertains to financial advisors, and you're not quite clear what it means. So if you're looking along on screen, and we'll put this in the show notes, there's an article online from Forbes Advisor, uh, entitled, what is a fiduciary financial advisor? And it says that for a fiduciary advisor, it refers to a professional that is required by law to act in their client's best interest. And then it says later on, fiduciaries have two main duties while managing money. The first is duty of care. Under this, fiduciaries are required to make informed business decisions by reviewing all of the available information about your financial life before making recommendations or plans. The second duty is the duty of loyalty. This refers to the requirement that a fiduciary not use their position to further their interest, such as making financial product recommendations they may make a commission on. So if you're looking at this definition, it kind of seems like the fiduciary advisor is someone who just has to be a good person, right? If you read that and you say, okay, a financial advisor has to put my needs above their own, well, that's what I was expecting when I came to a financial advisor in the first place. Okay, the next thing is a financial advisor has to have the duty of care, meaning that before they make a recommendation in one area of my finances, they have to look at the totality of my finances to make sure that that recommendation is appropriate. That seems like something that I would want them to do anyways. And because of these things that seem blatantly obvious to the public, it implies, and I think that there are some fee only advisors who feed into this narrative, that if you are someone who has even the ability to make a commission, then that automatically means that you are not putting the client's interest at the forefront of the conversation. And when you hear terms like fiduciary, meaning putting the client's interest ahead of the advisor's interest, it also implies that if you're not working with an advisor in a fiduciary capacity, then that advisor is automatically screwing you over or scamming you and you should just run for the hills. But to me, especially when there's a financial advisor that is furthering that narrative, it is an oversimplification of what it means to work with a financial advisor. And after the break, I'm going to tell you why I think it's oversimplified what it really means when you're not working with a fiduciary advisor versus when you are, and why, when it comes to the fee based versus fee only conversation. New money new problems as a firm has decided to stay on the fee based side of the fence.
[00:06:31] 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.
[00:06:50] Speaker B: Are you wondering what new money problems you might be overlooking in your financial life? If so, we've got great news.
[00:06:57] Speaker A: We've crafted the new money new problems.
[00:07:00] Speaker B: 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 gapfinder to complete it today. Again, that's newmoneynewproblems.com. Gapfinder. To take the assessment.
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[00:07:39] Speaker A: So what does it mean when you're working with a fiduciary advisor versus someone who's not a fiduciary advisor. We already covered what it means to work with a registered representative, where I've shared that I know several really talented and really moral registered representatives who do not have the licenses, or just maybe they do, but don't have the structure of their firm to have fiduciary relationships with their clients. Instead, they are more product focused. And I've shared already, when you're a registered representative, you just have to make sure that you did the best job you could of making sure that the product that you offered to the client was appropriate at the time that the recommendation was made. So let's say, for example, that you have a financial advisor who has a young client, who's 30 years old, just got married, and they're making $75,000 a year, and maybe they have a child that's on the way, and they're hoping to make sure that that $75,000 of income is replaced for anything that the family may need in the event of that client's death. Well, if you're a registered representative, you might sign up that person for, say, a 20 year, $1.5 million term policy, and you walk them through the process of explaining to them how they would use those funds in the event of the client's death to make sure that the family is okay, that sale is made, the client gets their term policy, the advisor gets a commission from the insurance company, which does not come from the client's money. The clients go on their way. There is no extension of that relationship beyond the point of sale. But maybe ten years later, that same client has now seen their income double. So now they're making $150,000, and maybe they have another child. So now they have two children, a, uh, significantly higher salary, significantly higher responsibilities, and they, unfortunately pass away prematurely. And the family now realizes that while they now need to replace $150,000 of income, they only have a life insurance policy that will replace $75,000. And they decide to take that registered representative to court because they made a, quote unquote, bad recommendation. Well, in that scenario, the standard to which the registered representative is held said, hey, at the time that I made this recommendation, this person was only making $75,000. They had just got married. They only had one child. I got paid maybe $600 in commissions from that policy ten years ago. It's not a reasonable expectation for me to be working with these clients every single year because I made $600.10 years ago. Now let's shift that to a fiduciary relationship which can operate in a fee based advisor environment or a fee only advisor environment. When you have a fiduciary relationship, one of the first things that it does is that it gives you a defined scope of engagement. And to me, one of the most important elements of that scope of engagement is the length of the relationship. So, for example, in our case, we have annual agreements. We re up them every single year for clients who are interested. And that says that throughout the course of this next year, they are engaged in a fiduciary relationship with Brenton Harrison and his firm. New money, new problems. Now, in this scenario, what this means is that as long as I'm in a fiduciary relationship with these clients, and we have clients that we've worked with for over a decade, if I sold them that term policy in the first year when they were making $75,000, and ten years later, they're still working with me and they're making $150,000 with two children and more responsibilities, I have the obligation of meeting with them at least one time per year to go over all of their finances. Remember, that's the duty of care, to make sure that that term policy that I offered them in year one is continuously appropriate for as long as I have that fiduciary engagement. So now if I'm taken to court in that 10th year, I have a higher burden of proof. I have to make sure that not only was it appropriate when I offered it, but that as the relationship continued, I went through the process of making sure that it was continuously appropriate. And that's one of the reasons that many people like the fiduciary standard. It makes sure that the financial advisor is looking at everything, and they're not just making a recommendation that pays them and ignoring what else is going on with your money. And to me, the reason that the argument that having a fee based relationship means that you have a higher likelihood of doing something amoral is you're looking over the point that if you're in a fiduciary relationship with a client, whether you're fee based or fee only, you still have that obligation. Whereas in the fee based relationship, the opponents of that style would argue that because you have the ability to earn a commission, you might offer a more expensive policy than the client needs, maybe a larger death benefit than is necessary. Maybe you push them to permanent life insurance when they shouldn't be in permanent life insurance. But they're overlooking the fact that when the rubber meets the road, you still have to prove that that was in the best interest of the client. The obligation does not go away. One of the other elements that I think is overlooked when you have the conversation of fee based versus fee only is the fact that financial advisors actually have to earn a living and they have to structure their business in a way that is scalable, repeatable and sustainable. And trust me, when you're talking about annual fees that in our case are 5000 for individuals, 6000 for couples and small businesses, it is not easy to just go and continuously get new clients. So let's say that I'm an advisor who's deciding that I wanted to do fee only relationships. And I was in that position where I added a client a month in the first year of me starting my firm. And let's go off of the couple or small business owner fee that we charge at new money, new problems, which is $6,000 for the year, $500 a month. That means that in month one, because we only had that one client household and they're choosing to pay monthly, we only made $500. In month two, when we add that second client, we made $1,000. In month three, we made $1,500, so on and so forth. That would mean that in year one, before taxes, that advisor who likely has staff, who likely has cost and does not take home the full fee that they are charging, would make $39,000 before taxes and expenses, not exactly what you would consider an income that would allow you to sustain yourself as an advisor. Now, another element and another revenue source that can come into that equation for a fee only advisor are the fees that they charge for managing assets of their clients. And that's where you can see a lot more sustainability for an advisor who has a large book of business in terms of the investments that they manage. So now let's take those same planning relationships where you're getting a new $500 every single month. But let's assume that in short order, this advisor is able to build up a book of business that's $10 million of assets under management, and they're charging 1% as their advisory fee. Well, now, instead of that $39,000 that they got just from planning fees, when you add on the assets under management, they made $139,000, which is much more sustainable. But it also means that you have to have the ability to attract people who are going to invest $10 million with you in a very rapid period of time if you want to make it long enough to have a sustainable firm. Well, you guys have been listening to this podcast long enough to know who we target. We work with minority first and second generation high income earners. Most of them are in their mid thirty s to early 50s. They're often the first in their family to be confronted with many of the issues they're facing, whether it be equity compensation, student loan debt. This is not a client base that lends itself to rapidly finding clients who can put $10 million with you and put you in a position where you can have a sustainable practice just off of the fees that you charge. But let's also look at this client base and see what many of their needs are. The overwhelming majority of clients with which we work do not have the appropriate amount of life insurance. In many cases, they don't have the right amount of disability insurance for those who have parents for which they're taken care of financially. Those parents may not have long term care insurance. And not only are these things lacking, but they often are looking for someone to help them navigate the process, to make sure that they're purchasing and securing the right products. Well, because of those things, because of the fact that the average client with which we work may have a household income of $300,000, but they also likely have student loan debt of a minimum of $150,000. Because they are trying to play both sides of the fence in terms of learning financial literacy while also keeping up with the people at work. There's not often an account at all that we would be in a position to manage. And because of those insurance needs that come with the state that they're in financially, it would make no sense turning down a revenue source where we can help them with recommendations that we've made to secure the products that they need and walk them through that process in a way that allows us to earn enough revenue that we can actually do quality planning without feeling the need to go get 20 more clients before we're ready to, and in a way that could compromise the quality of that planning. And this explains why we've chosen the path that we have. In the next episode in this series, we'll talk more about what it looks like to go through a year as a client of our firm, whether that be year, uh, one, or whether you're an ongoing client. But you'll find that most of the people with which we work, they come to us looking for student loan strategy, employee benefit optimization, tax optimization, insurance needs, and recommendations on consolidating old retirement accounts. We work with people who have equity compensation, and we're helping them navigate what it means for their taxes, what it means for the strategy of how much of that equity with the company that they keep versus how much they diversify. And in that process, we were able to work at our own pace, take our time, and make sure that the client is not only completing our recommendations, but they actually are ganging the financial literacy to make sure that they understand why we've made the recommendations and do so in a way that, uh, allows us to be profitable and allows us to continue to choose the people with which we work, rather than being forced to work with a different community because of concerns we would have about the consistency and size of our firm revenue. So, to be clear, just like there are bad financial advisors and bad professionals in every industry, I also think there are fantastic registered representatives and advisors in each of the silos that we've discussed amongst the three that you'll find in this industry. And I hope these details give you some more information as to what type of advisor might be the right type for you, but also more context as to why certain firms structure themselves the way that they do. Next week we're back in our series about homeownership and home equity, and I.
[00:18:11] Speaker B: Hope to see you then 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 close.
Mhm.
