Let’s address the elephant in the room head on: not every financial professional has your best interests at heart.
Some people in our industry are mostly in it for themselves: they want to make a quick buck, and if that means using you and your life savings to get there, then that’s what they’re going to do.
That’s really what this article about transparent financial planning is all about: the motivations behind different types of financial advisory services.
These (often hidden) intentions can make a big difference to your investment portfolio over time, and could significantly impact your financial well-being if you’re not aware of them.
Transparent Financial Planning (Fee-Based) vs Commission-Based Financial Services
To keep things simple today, we’re going to divide our focus into two strict ‘types’ of financial planning:
- What we call transparent financial planning (otherwise known as fee-based financial planning, where the financial planner is a legally accountable fiduciary); and
- Commission-based financial services, where advisers are paid a commission for each product they sell to clients, regardless of whether that product is the best product for those clients.
Now, it’s worth acknowledging upfront that this strict dichotomy around commissions doesn’t always play out in practice (as even fiduciaries may offer some commission-based products, and some commission-based services adhere to a lower “suitability standard”), but we believe these broad strokes will help us gain a better understanding of the industry overall.
It is also true that the main difference between the two approaches is pretty consistent: transparent financial planning always puts your interests first, and will tell you about any fees and commissions clearly, from the outset, whereas many commission-only financial advisors will discreetly prioritize their bottom line, whether or not that decision comes at your expense.
What is a Financial Fiduciary?
According to the CFA Institute:
“The term “fiduciary” generally refers to the requirement for loyalty, prudence and care for those who manage assets for the benefit of another person. Fiduciaries have a duty to put their investors’ interests before their own and disclose potential conflicts of interest.”
In the same resource, the CFA Institute is careful to distinguish a fiduciary standard from the lower “suitability” standard you might find at some financial institutions:
“Those who work under a “suitability” standard only need to ensure that their recommendations are consistent with investors’ needs, objectives and circumstances given their income and age.”
In other words, this secondary standard offers a more general approach, rather than an individualized, duty-bound one.
It’s important that we keep this kind of nuanced distinction in mind throughout the rest of the article, where we will explore the five key factors smart investors like you should consider when deciding between transparent financial planners (fiduciaries) and commission-based financial services (some of whom adhere to the “suitability” standard, while many do not).
1. Fee Structure
Transparent Financial Planning | Commission-Based Financial Services |
This approach typically operates on a flat fee per consultation or a time-based rate (e.g. an annual fee for long-term services). This can include, for example, a one-time fee for an initial plan and ongoing fees for regular updates, consultations and portfolio management. | This kind of advisor earns money through commissions on the financial products they sell, such as mutual funds, insurance policies, or investment accounts their parent company is incentivized to market to you. While this may seem cost-effective at first, it can lead to higher costs over time due to undisclosed fees within the products themselves. |
Here, you know exactly what you are paying for, there are no hidden costs, and, where your financial planner is a fiduciary, you can rest assured the options you are presented with are in your best financial interests. | In this approach, the person selling you the product has no obligation to let you know if this is the best course of action for your unique situation. They get paid when they make the sale. |
IPF Analysis: Given the content of this article so far, it might not surprise you to know that we primarily operate a transparent financial planning business, and that our team is comprised of fiduciaries.
Although we do offer a few commission-based products — e.g. different kinds of IRA — we only provide those where we believe they can add the most value to your situation.
In Greg Liszka, our President’s, words, this is how we run our business:
As your Registered Investment Adviser (RIA) through Vicus Capital, we are going to charge you an annual fee, which is a fee for service. Normally, I charge 1% annually. We agree to that right up front: there’s a form.
I’m not selling you anything. You hire me to fix a problem, or to do a job — however you want to phrase it. The more money you make, the more my income goes up. If the fee stays the same, I get more out of $120,000 than I do out of $100,000. So the incentive is there to make you as much money as possible, which is ultimately what you want anyway, right?
Part of the way we put that into practice is by sitting down, listening to your needs, and getting to know you as an individual, so that we can make sure we are tying our services to your situation. Everything we implement after we begin that relationship is geared towards helping you reach your unique life goals.
As a fiduciary, that means there are certain things we will always apply practically as we work for you. Although we are interested in maximizing your returns, we don’t want to do that in a way that would jeopardize your portfolio overall. As Greg puts it,
“There’s a risk-reward characteristic we have to take into account. I don’t want you to lose sleep at night because you’re not being cautious enough and you’re getting too much volatility. So we try to minimize that. But our fee structure is very transparent. That’s all it is: a platform fee, what I get paid, and that’s it.
2. Transparency
And with that thought on transparent fee structures, let’s dive into the second key marker to compare and contrast these two approaches: transparency.
Transparent Financial Planning | Commission-Based Financial Services |
True to its name, this method emphasizes clarity and openness. Financial planners disclose all fees, potential conflicts of interest, and the specific services provided. Clients receive detailed explanations of their financial plans and the rationale behind each recommendation. | Transparency can be an issue here. Advisors might not fully disclose how they earn their commissions or the fees embedded in the products they recommend, making it difficult for clients to understand the true cost of services. |
IPF Analysis: A transparent financial planner will provide a clear breakdown of their charges, showing exactly where your money goes and how the proposed strategy works in your best interest, while commission-based services often bundle hidden fees into the products they sell you, obscuring the real costs.
At Iron Point Financial, we’re committed to making things as plain and simple as possible, so that we can do the best job possible for you. We believe that when you understand what’s going on, and how it suits your interests, you can better trust us to do a good job for you.
Sadly, our time in the financial world has shown us that this is not the norm. In Greg’s experience,
“The industry I am in has its own language. It’s a bit like the legal field, where everything is written in Latin… There’s a whole different language in our world: a way of thinking which boggles most people’s minds.
I’ve heard from our clients a desire to feel like they’re not being sold something. People want an education on the service to the extent that they know you’re capable. They want to know that you know what you’re doing, so they can say, “I’ve got a family and a life over here, and if you can worry about the financial side of things for me, then that’s fantastic!”
People are busy doing their job making parts, or whatever it is they’re great at. That is their life, and they’re really good at that thing, and I would suck at their thing. So we’ll trade: why don’t you be my nurse, and I’ll be your finance guy?
3. Conflicts of Interest
We touched on this in the previous section, but the third key distinguishing mark between transparent financial planning and commission-based financial services relates to conflicts of interest, and how each type is likely to deal with them.
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Transparent Financial Planning |
Commission-Based Financial Services |
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With a flat fee or time-based rate (e.g. hourly, monthly, annually), advisors have no financial incentive to push specific products. Their primary goal and legal duty is to serve the client’s best interests, ensuring their advice is unbiased. |
There’s huge potential for undisclosed conflicts of interest here. Advisors may be motivated to recommend products that offer higher commissions for them rather than those that best meet the client’s needs. |
IPF Analysis: The key here is the regulatory distinction between a legally accountable fiduciary duty and any other standard. Even where an advisor from the second column aligns with the “suitability standard”, there is no guarantee that their recommended products are in fact the best option for clients like you.
It is often the case with commission-based financial services that there is no true regard for your specific life circumstances and goals; at best, you may get a slightly modified “one-size-fits-all” solution (i.e. slightly modified for a generalized age and income bracket).
The difference with fiduciary-based, transparent financial planning is that you, the client, are ultimately in charge; you direct the overall operation. So, at a firm like Iron Point Financial, everything we do happens at your say-so:
“Being a fiduciary is all about communication. It’s about showing clients the math and providing different options to fulfil their needs. At the end of the day, if the client gives an order, that’s it. They can make whatever decision they want…
It’s our job as fiduciaries to educate people as to the consequences of their decisions. Ultimately, you are the boss. If you give an order, it has to be executed.”
4. Personalization
Our fourth key is in some ways the most important one. We believe that every client is different, and every financial planning solution should therefore be personalized.
This is a major point of contention in the transparent financial planning vs commission-based financial services conversation…
Transparent Financial Planning | Commission-Based Financial Services |
These services are usually highly personalized, focusing on the client’s unique financial situation, holistic life goals, and risk tolerance. Advisors take the time to sit down with, listen to, and understand their clients so that they can go away and create tailored plans that honor what they have heard. | While some commission-based advisors offer quasi-personalized advice, their need to sell products can overshadow and obscure any meaningful focus on an individual client’s needs. With this approach, the advisor’s primary aim is to secure a profitable sale for themselves or their company. |
IPF Analysis: Let’s say you’re a young professional looking to save for your first home. A transparent financial planner would create a custom savings and investment plan for you, while a commission-based advisor might steer you towards investment products that have nothing to do with your short-term goals. It’s possible you might still ‘get there’ with the latter approach, but more by happenstance than intention.
The way we see it, being a transparent financial planner means helping you reach your goals as our absolute, main priority. Greg likes to use the metaphor of a bridge to describe this fiduciary function:
“Here’s my job: my job is never to tell you that you can’t do something (unless it’s so obviously unattainable); my job is to figure out how to make it happen for you. I’m here to fix problems.
We have where the client starts from and where they need to go. All they have are those two points, but there’s a bridge missing. So it’s my job to construct this bridge and figure it out: how do I get them from point A to point B? We’ve got to do the math.
Another way of putting it is to say that with transparent financial planning, you get a private, custom-built, financially engineered ‘bridge’ to your unique dreams.
And then, on the other hand, with commission-based financial services, you get a slow public bus that loads of other people use, and that grinds to an agonizing halt at every single stop along the way; you might eventually ‘get there’, but is that really the kind of journey really you want?
5. Accessibility
Our fifth and final key is again relationally-focused: accessibility. When it comes to fiduciary financial services, it’s all about trust, and all about the relationship you share.
The same cannot be said of commission-based financial services, which tend to have a far more one-and-done, transactional emphasis.
Transparent Financial Planning | Commission-Based Financial Services |
Often more accessible to a diverse range of clients, transparent planners cater to various income levels and financial goals in a long-term, dynamic relationship in which questions and mutual understanding are welcomed. Their clear fee structures make it easier for individuals to budget for their services and to understand exactly what value is being added, and why. | These services can often feel a lot less accessible, particularly for those with modest assets, as these advisors may prioritize clients who can generate higher commissions. Or, if you have a lower income, they may spend the bare minimum amount of time selling you a basic product, and then move on to the next profitable customer as soon as they can. |
IPF Analysis: If you’re looking to work with a financial planner you can check in with throughout the year, we reckon you are far more likely to find that with a transparent financial planner, precisely because they care about you and they have a fiduciary responsibility to put your needs first. With commission-based financial services, it’s usually a one-time affair: sign the form, pay the cash, see ya later…
In the latter case, you will still (probably) make gains, but you could be sacrificing a more personalized, optimal strategy, and you are almost certainly losing out on the opportunity to talk through strategic changes with your advisor throughout the year.
Moreover, with a transparent financial planner, you can always can catch up to see if your financial plan still matches your goals, or if it needs updating.
Transparent Financial Planning: The Final Verdict
Transparent Financial Planning:
- The value here lies in the long-term benefits of unbiased, personalized advice in a fiduciary-client relationship. Clients know what they are paying for and can trust that the advice offered is in their best interests.
Commission-Based Financial Services:
- While potentially coming with a lower cost upfront, the hidden fees and potential conflicts of interest can diminish the overall value you gain over time. Clients might end up paying more in the long run without ever receiving truly impartial advice.
Parting Words
When comparing Transparent Financial Planning and Commission-Based Financial Services, it is our opinion that transparent models offer clear advantages for intelligent investors. The benefits of transparent fees, unbiased advice, personalized plans, and inclusivity make it a compelling choice for those looking to maximize their financial well-being.
If you’re ready to take control of your finances with a transparent financial approach, consider scheduling an appointment with one of our experienced financial planners today, to learn more about how we can help you achieve your financial goals with clarity and confidence.
Or, if you don’t feel ready to talk to an adviser just yet, but you enjoyed this content, you could sign up for regular email updates from our blog, so that you don’t miss future posts.
Iron Point Financial is here to empower you to secure a brighter tomorrow. We operate physical offices in Grove City, PA and Greenville, PA.
We primarily serve residents of Pennsylvania, Ohio, West Virginia and Florida but we also have security registrations for 22 other states across the continental USA.
