This is a very complex area within our industry, with a lot of different players. It is no wonder, you as a consumer, can feel overwhelmed. So let’s gain some understanding and perspective.

Historically people use to (and some still do) pay a commission to purchase mutual funds. These baskets of securities or mutual funds came on the scene around 1976 and exploded when IRAs were created by legislation passed in 1974. Up to this point people pretty much purchased individual stocks or bonds at a brokerage firm and they were charged a high commission that varied based on the number of shares or bonds they purchased. When I entered this business in 1981, mutual funds would charge up to 8.5% or more on a class A share (front-end load) in the early 1980s! People would purchase these at a brokerage firm or directly from the investment management company (mutual fund). Mutual funds then began to expand their share offerings. They came out with Class B shares (back-end load of up to 5% if the fund was sold in the first 5 to 8 years) and Class C shares (level load around 2% to 3% every year). Most class A share loads have come down to 4% to 5% due to pricing pressure.

Banks and Insurance companies also jumped on the band wagon and started selling mutual funds. They added annuities which are typically a high commission tax deferred insurance product. When Dean Witter, a brokerage firm, bought Sears, their slogan was “buy your stocks where you buy your socks”. Today, many banks, insurance companies and brokerage firms are still selling mutual funds and annuities using this commission model. Historically, they have been in the business of selling products and less about giving financial advice.

As brokerage firms, banks, and insurance companies were humming along in the late 1970s, a new player was coming on the scene – small, independent financial planning firms. The beginnings of this new profession grew out of a meeting with a group of individuals in the financial services industry back in 1969. These individuals saw a need for financial advice in different disciplines within personal finance. By the early 1980s this type of financial service was catching on. Different compensation models were developed and some are still in effect today. Some charged a fee for advice and also received commissions. This fee structure has come to be known as Fee-Based (Fee + Commission). A smaller, yet growing, sub-set of these financial planning firms were using no-load mutual funds which, by the very name, did not charge a commission on the securities. The financial planners in these firms received compensation directly from the client for their services. This is known as Fee-Only. Several different structures were used such as project fees, hourly fees, but the one that gained the most attention was Assets Under Management or AUM. This is based on a tiered fee structure that typically starts at 1% and the fee changes based on the value of the investments. Many still use this fee model today.

By the late 1980’s, this alternative form of giving personal financial advice had evolved and financial planning firms were growing at a faster pace than the brokerage, insurance and banking industry. This change made many brokerage firms take note as they began to lose business to these growing financial planning firms. Many brokers, or account executive as they were called at that time, started to jump ship as well and joined financial planning firms or started their own firms. Again, I lived this and remember the disruption this was causing in the brokerage industry. Out of this change, regional independent organizations were created such as Raymond James. Edward Jones, etc. Some of these firms still charged commissions and others adopted the AUM model. The emphasis for these firms has mainly been on investing with some financial planning sprinkled in. They have only recently started to adjust the depth and level of services they provide.

As the fee-only independent financial planning industry continued to forge a new path of putting the client first vs. putting the firm first, such as __________ (you can fill in the blank – Merrill Lynch, PNC, Edward Jones, etc.), the financial services industry began to draw a line in the sand. Separating the wheat from the shaft comes down to where an adviser is employed and how their organization is governed. An investment adviser working at a fee-only financial planning firm is bound by a fiduciary standard that places their clients’ interests ahead of their own. Brokers work for a broker-dealer (brokerage firm, banks and insurance companies) whose interest they serve. They follow a suitability standard which means only that transactions must be suitable for the clients’ needs. Most brokers’ compensation model is based on meeting a monthly quota - selling commission products or meeting an AUM level for the good of the firm, not for the good of the client. Financial advisors at most financial planning firms are paid a salary. This smaller sub-group of financial planning firms has continued to push the industry to change and adapt based on the needs being identified within their client base. Brokerage firms have reluctantly adjusted as the landscape in the financial services industry has shifted from sales to advice.

Another force driving this change came around 2008 from some investment management firms when exchange traded funds (ETF) came on the scene in a big way. Many of these were passive investment options that follow an index and their fees were dirt cheap. This forced many actively managed mutual funds and investment management firms (many providing these services at brokerage firms) to cut the internal expense ratios and fees they were charging to better compete with these new pooled security options. This has, in many ways, revolutionized the investment playing field as ETFs are no-load.

The big players still have the advertising dollars to boast about how wonderful they are. I always get a laugh when I listen to the large brokerage or money management firm boast in their advertisements about their “unique” fee structure or providing financial planning, as if it’s a new thing. They have been dragging their feet the whole way as change presents itself, but their advertisements sure sound very different. In reality, we know who is really moving the dial and it isn’t them.

In the sea of financial services, this small sub-group of fee-only financial planning firms, of which we are one of them, have been the rebels and the tree shakers. This collective group continues to chart new courses as change is always upon us. One change we have adopted is in our fee structure. It is called a Flat or Fixed fix where the fee is based more on the client’s situation and less on the amount of assets clients have to invest. The story will continue and we are proud to be a part of an elite group of financial planners always pushing the envelope and striving to improve our profession for you and our clients.