These days the clear lines of demarcation between different financial advisory are a blur. The compensation structures of the various financial advisors – hidden and disclosed – has changed a lot. The sad reality is that investment brokers, financial planners, financial advisers, financial consultants are all different words for a salesperson.

Why should this matter to you?

The quality of the advice you receive greatly hinges on the how you pay for the financial advice you get and the conflict of interest that’s attached to it. Thus, the amount of money the these sales people get, is the undercurrent that drives the advice they choose to give you or not.

How Compensation Biases Your Financial Advice

Compensation greatly biases financial advice and here is how the various compensation structures bias the financial advice you receive:

1. Commission Based Financial Advice

Products with a commission based compensation structure include insurance products, stocks and mutual funds. The more business they bring, the more they get paid – transactions dominate and motivate the sales person. The goal is to create more transaction activity, with a great focus on high commission products.

Such advisors have little to no regard for the suitability of the products to the clients. This makes, commission based financial advice have the greatest conflict of interest of any compensation structure in the industry.

“Fortunately for serious minds, a bias recognized is bias sterilized,” – Benjamin Haydon.

2. Percentage of Assets Under Management

Products with asset under management compensation basis include bank deposits, bank loans, mutual funds, unit trusts and more. Under this compensation structure, the motivation is to maximize consistency of returns rather than profits. This is because, consistent returns increases customer retention rates, which ultimately maximize the investment advisors profits in managing more assets.

A typical situation where asset based compensation posses conflict for advisors is in mortgages under asset management. Advisors will typically advice clients not pay off a mortgage, even though it carries a high interest rate because it will diminish the assets under management.

Another situation is in managing funds and unit trusts under this model. Assuming they charge 2% on assets managed. When you do the math, you’ll realize that at 2%, for a Ksh. 1M investment, they’ll make Ksh 20,000 a year. This is a fee you would typically resist if you were told transparently rather than as a percentage.

Remember, the ultimate goal here is to protect and enhance compensation.

3. Profit Incentive Fee

Under this compensation structure, the advisor is paid a percentage of profits. Sounds great, right? I mean they make money only when you do. This is a misleading sales pitch because you’ll assume that your interests align.

However, you only share profits, not loses. In reality, this model will only motivate the to take greater risks in the hopes of creating greater returns so they can get paid handsomely. At the end of the day, the capital isn’t his/hers and all loses realized are yours to bare – not his/hers. Thus, you bare the full brunt of the risk taken, and for the advisor its just another risk free return.

This compensation structure will likely get you more risk – as for profit? You may or may not end up with more profit.

4. Fee-Only Advice

Fee-only advice is commonly adopted by financial planning and coaching services that get paid they the hour. These services don’t receive a reward for any financial transactions that may arise as a result of your interactions with them – no commissions, residual trailer fees or kickback revenue. Therefore, this makes this type of compensation structure the closest you will ever get to getting financial advice that isn’t marred by compensation.

At Wealth Architects, we’ve used this model. The sole motivation of a true fee-only adviser is to provide you with as much valuable financial advice as possible for the money pay, so that you may continue to purchase more services.

However, there are some limitations:

• Beware of the limitations of your advisor’s experience, education, skill and intelligence.
• Beware of your advisor’s personal morals. Some advisors may opt to partake in kickbacks but claim they are fee-only advisors.

Note that this compensation structure isn’t the most profitable when operated in its truest form. This is one of the challenges I have faced as a financial planner. I would make more money selling financial products and managing money directly, but I have always believed that the best way I can serve is by separating advising from product selling.

Learn more: Financial Coaching: What Is It and How Does It Help

How to Increase the Value of the Advice

There is no perfect compensation structure that will make your advisor care more about your money more than their own money. However, there are ways to increase the value of the advice you get and reduce or eliminating conflict of interest.

Here is how:

Understand the Incentive

Understand what drives the financial advice i.e. the incentives that the advisor stands to get. Always ask your advisor to disclose how they stand to gain the transaction.

However, even with is It isn’t wise to completely ignore all the information get just because its unreliable – back it up with some research.

Separate Fact from Opinion

Separate the facts from opinions in the advice you receive. Know that facts, do the math.

Facts matter, not the sweet blend of words in the sales pitch. Make it a habit to fall back on hard data and numbers to drive your investment decisions.

Realize All Advice Isn’t Equal

Not all advice is made equal. Take note of the educational background, experience, and skills of the advisor before you attach merit.

The sad reality is that a lot of financial advisors don’t even fully comprehend what they are selling. They are taught what to say and how to say it – truth or not.

Use Sales People As A Resource

Use financial product sales people as a source of information only. They’ll introduce you to great investment products that can be used to build your portfolio. When they make a sales pitch, take it with a gain of salt and deem it as the first step to educating yourself – in simple terms, building awareness that x product exists.

Never invest based solely on recommendation. Always remember that there no truly free financial advice – you’ll pay for it one way or another. A poor investment decision based on poor quality advice will cost you a lot more down that road.

Take note, true advice is…

• Paid for directly – not through incentives from the products you buy.
• Results from paying disclosed fees for services rather than hidden fees.

Learn More: Reasons To Be Your Own Financial Expert

Bottomline

In an ideal world, financial advisors of any kind ought to act in the best interests of their clients, and therefore must set aside their personal interests and fully disclose all their fees and any conflict of interest.

This, isn’t the case almost 99% of the time.

You’re responsible for your money and the investment decisions you make.

Nobody cares. Nobody cares about your financial future more than you. That! – you can bank on.

And that’s the best financial advice you can depend on – from me with love.

Happy Building!

Image credits: Top by by Anna Tarazevich from Pexels

Future financial wealth creation is primarily hinged on adequate financial planning and budgeting in the present. Hence, individuals who seek to proliferate their wealth prospects require a well thought out financial plan of expenditure and investments. Financial planning plays a key role in our success and should be given due weightage. Financial planning and the creation of wealth by word and spirit involves comprehensive mapping of the financial elements of our lives into a master plan. It entails setting up short term and long term goals in relation to the various facets of financial planning such as asset management, investment management, cash flow management, insurance, estate planning and many other aspects of others financial well-being.

Do you have a plan in place? If not, what are you waiting for?

To accelerate your personal financial growth, you’ll need a target wealth creation plan that will help you expand your personal wealth though the following ways:

Through Income Growth

For future financial wealth creation, you’ll need to lay the groundwork now to ensure stable and growing earnings. For instance, as an employee, you’ll need to consider investing in education to better your skills thereby, increasing income. As a business owner, the stable growth of your business(s) is vital for financial security.

Additionally, you’ll also need to learn how to better manage that income. Adequate management of income as it comes in from your career or business is vital to expand your wealth. Here, we leverage time to invest and expand wealth. This is where your master plan will come into play. How you execute it matters in accelerating personal financial growth.

Learn more: How to Build a Passive Income Strategy

Through Investment Growth

For you to hit your target wealth in this lifetime, you’ll need to be making money while you’re asleep.

Target wealth creation can be achieved either by making new investments in phases or rewarding existing assets that grow in value. Though the latter is a function of decisions made in the past, it can be expanded to reduce risk, increase return and create more wealth through diversification.

If you are starting out now, there are few preemptive fallacies you need to avoid while developing your long-term financial goals:

a. Undermining your own financial needs and preferences. This leads to poor financial coverage and resource misallocation. Once you have a predefined resource list, draw a clear line between expenditure and savings targets to achieve your financial goals.

b. A single focus that limits your area of play and returns. Diversify your investments as much as you can. Consider taking on expert advise and strategically model your investments in such a way the derives maximum yields.

Learn more: No Shortcuts. No Cheat Sheet. Expectancy Investing!

Through Personal Development

There is saying that goes, “For things to be different, you have to be different. Before financial success can occur, personal growth must occur” – Jim Rohn

In order to sustain your personal financial growth, you’ll need to grow and expand your skillset. Your skills for financial management will catapult your growth to new heights and move you closer to your target wealth.

With personal development there are several other things you can leverage:

• Systems and technology. Learn how to use the financial technology that’s in the market to get more done with little effort. Nowadays, more and more people are utilizing Robo-advisors (digital financial advisors) to automate, lower cost and better manage their assets based on their goals and risk appetite. Other systems and technologies you can use budgeting assistant apps, AI virtual assistants, cryptocurrency and blockchain, insurtech, digital lending and credit and more.

• Networks. Use your network to utilize other people’s resources and connections to gain market insight and move beyond your own galaxy of information.
• Knowledge. Yes, you can expand your own skills and expertise on the subject but don’t limit yourself to just that. Also leverage other people’s talent, expertise and experience. With it, you make use of a greater body of knowledge that you can ever come to possess on your own.

All in all don’t simply manage your time, leverage to get the most out if. What we have for sure in this life, is limited time.

Learn more: Leverage: The Key to Amassing Wealth

Through Debt Management

To move even further and fast track your financial goals, you’ll need to utilize financial leverage. At some point, if not now, you will need to leverage other peoples money and expand your own financial limits to generate more in income. To ensure this option is open (if you’re not already utilizing it), keep a financial good standing. Adopt good debt management habits.

Consider the following 3 c’s of creditworthiness:

• Character. Reduce your own perceived risk by building trust. Maintain a good credit score and always pay back on time. This will help you establish good relationships with lenders,

• Capital. Maintain a healthy book of assets. This may be savings or assets that can be used as collateral. At some point, you may want to go big and will require security for leverage. Whatever assets or resources have, maintain them well and keep growing their value.

• Capacity. If you have a steady and growing income, then your present and future ability to meet financial obligations will not be called into questions. Thus, focus on income generation and growth.

Learn more: How to Build Wealth Rapidly

Key Takeaway

Creating and building wealth is a marathon that requires a holistic rather than a selective approach.

Three key takeaways:

• To move from now to your desired future, you’ll need to utilize resources that extend beyond what you currently have – expand your income, investment opportunities, personal skills and your creditworthiness.
• It is wise to consider having an expert advisor that will help you develop a holistic model of your investments for maximum returns. Every area of your life needs due consideration and adequate resource allocation.
• Don’t be restricted by your current personal limitations, there is wealth to be out there. Get it, leverage it…just go for it.

Happy Building!

Image credits: Top by Karyme França from Pexels