How a "Fee-Only" financial advisor differs from the traditional model

You may have heard the term “fee-only” financial advisor. In fact, Toups Capital Advisors uses it. Well, what does it mean?

Simply put, a fee-only financial advisor only makes money from advising clients, such as from an hourly rate or percentage of assets.

Sounds pretty obvious, right? In fact, if you were to poll people on how financial advisors get paid, most people would probably list those two ways. But you’d be missing a major category that many large banks and financial groups use: commissions.

Yes, that’s right, non-fee-only financial advisors earn commissions, just like salespeople at a car dealership or retailer.

As a fee-only financial advisor, I think this poses a big problem. Below are some examples:

Annuities and Insurance

Have you ever talked to a financial advisor and they suggested you need an annuity or other insurance product? And on top of that, they would help you pick the right annuity or product?

Before you decide, you should know that annuities/insurance pay some of the highest commission rates to financial advisors.

I have advised clients with annuities who ultimately decided to surrender them and re-invest the capital themselves. Annuities are often packed with high fees which are a drag on return. On top of that, the promised rate of return is usually not that high.

If your advisor stands to earn a large payday from selling you an annuity, how can you be sure that this financial product is truly right for you?

Instead of an annuity, talk to us at Toups Capital Advisors about how to achieve your financial goals without a high-fee, commission-paying product.

Mutual Funds

Many advisors still guide their clients toward mutual funds over ETFs. Why? Perhaps because of the commissions they earn.

Most mutual funds have a sales load, typically a one-time charge that you pay. Usually this comes when you buy into the fund, called a front-end sales load. This fee helps pay a hefty commission for any advisors that direct their clients into that fund.

In contrast, ETFs have ongoing fees as a percentage of assets, but they don’t have any fees upon entering or exiting the fund. Most ETFs don’t pay advisors any commission, and they have much lower annual fees.

For instance, let’s say you told your advisor you wanted to invest in Chinese equities. Compare the two following investment vehicles:

The Fidelity Mutual Fund has an annual fee that is almost 2x the ETF. On top of that, you would pay a 5.75% fee just to buy into the fund. So if you invested $100,000 in this fund, Fidelity would take $5,750 right off the bat!

Putting it all together

Frankly, I hate seeing how some financial advisors charge their clients. In particular, many of the traditional large banks and advisor groups charge 1% of assets under management, plus they take commissions, and on top of that, they recommend high-fee products to their clients.

You could be paying 2-3% of your assets annually to your financial advisor and other financial groups. That’s an astonishing share of growth, particularly when average S&P returns are only 6-8%!

Unfortunately, all of this is “legal” as long as it’s disclosed. These disclosures are all stored at the Investment Adviser Public Disclosure Database, and your advisor is obligated to give you a copy when you first start working together and annually thereafter. But while it’s disclosed, many people don’t read these disclosures closely and they don’t consider the full implications until they have already developed a deep (and costly) relationship.

Lower fees at Toups Capital Advisors

At Toups Capital Advisors, we promise never to make commissions from any products we recommend. Furthermore, we charge an lower-than-average annual fee on assets under management. We believe your financial future is dependent on paying the lowest possible fees, and we designed our pricing model to match that.

Contact us today to discuss your financial future.