The Blue Blaze

The Financial Services Industry is Charging You All Wrong

Posted by Frankie Corrado

If you’ve always had a sneaking suspicion that your financial advisor is profiting from his advice to you, you’re probably right.


The traditional financial services industry uses a compensation model (meaning how the advisors get paid for working with clients) that is RIFE with conflicts of interest. This conflict has been going on for quite some time, but you’d think that the big banks would not be so blatant about it. See Merrill Lynch’s recent mandate that its brokers must refer their clients internally to Bank of America, or risk losing compensation.

From the Wall Street Journal: “Merrill Lynch will require its brokers to make at least two client referrals to other parts of parent Bank of America Corp. next year to avoid a cut in pay, a tweak to how the bank compensates its more than 14,000 brokers, people with knowledge of the matter said.”

So Merrill Lynch, as an organization providing “recommendations” to its clients, is telling the advisors who are providing these recommendations, to refer them to other parts of the company. If I was a client of Merrill, and they recommended that I refinance my mortgage or take out a HELOC, I’d wonder if they’re making that recommendation because the decision is in my best interest, or because the advisor is now REQUIRED to do so?

It’s not that the Merrill Lynch's advisor is a bad player, it’s that the whole financial services referral/commissions/AUM model goes against the best interests of the client. If the client doesn’t need it, why refer it? Well, it’s being referred because the company is seeking more profit, which then makes it in the interest of the advisor. But shouldn’t this process start with what's in the best interest of the client?!?

Later, the article states:

“Before that, Merrill cut how much brokers were paid on accounts with less than $250,000 in assets to encourage them to work with bigger clients.”

Again – this creates a conflict of interest relation scenario. If your advisor is punished because you don’t keep a lot of assets with him or her, then they may be giving recommendations to boost that number.

None of this occurs under the Blue Blaze Financial Life Guidance model. And it’s not because we are “trying to be different.” It’s because it’s the only way we know how to do business. 100 percent client interest, all the time.

How should a financial advisor be paid?

A financial advisor should be paid in a fashion that does not motivate him or her to financially benefit based on their client making a decision as a direct result of advisor recommendations. Ideally, this would be done through an up front, agreed upon, fixed flat fee that is updated annually. The fee should be reasonable for the services and value provided, not based on an archaic percentage of assets or commissions.

Side note - I feel like financial services don’t just get the fees wrong, they get almost everything wrong - fees, relationships, conflicts of interest, incentives, etc - it’s all self-serving. While we think we have this model down, there are others like us (but not many) - check to see if there is an advisor that is part of the Alliance of Comprehensive Planners in your area to make sure you are getting the most modern and comprehensive financial planning services around.

Our client relationships are based on trust. While not the industry norm, the only way we know how to work is to put our clients’ interest above our own. We are bound by a Code of Ethics, which was adopted by the CFP Board to establish the highest principles and standards.

We don’t sell products, give or receive referral fees, and are transparent with any fees related to our advisory services.  

Clients often want to know how much financial advisors cost, but the better question is, What kind of financial advice do you get for your cost?

Consumers want coaches, not managers

In a recent article in Financial Planning Tom Nally, president of TD Ameritrade Institutional made the case that the financial planning industry is behind in both its pricing models and the kind of financial services individuals need today.

"Consumers want life coaches but advisers are still billing on assets under management," he points out. To drive net new assets, advisers must consider providing "white glove service" and "create a client experience that is worth sharing," Nally says.

This resonates with us where our firm has evolved our client services from financial planning/advising to financial life guidance.

Financial life guidance isn’t a new name for an old service. It’s a deeper level of service where an advisor becomes a coach and the client a friend. The coach’s leadership extends to all the areas of the friend’s life where money reaches (and isn’t that everywhere?). Beyond traditional financial planning, we listen to where our clients want to go in life and we help them to take actionable steps toward those destinations. That could be launching a new career, planning a legacy or even finally getting physically (and financially) healthy.

Instead of offering advice, a financial life guide offers wisdoms and insight, a true understanding of the client’s life, and helps paint the bigger picture of how the seemingly disparate components in the client’s life actually intertwine. Our goal is to restore vigor and passion to the client’s life in every area. That’s an experience that’s worth sharing, but I’m not sure it’s one the industry will jump to adopt - at least not as long as it sticks with its self-interested profit model.

How much does financial life guidance cost?

We price financial life guidance with an aim to be fair to the client for the value they receive and fair to the financial life guide for the value that they provide due to the comprehensive approach. This means pricing based on the size and complexity of the individual client’s unique situation, not just assets in their brokerage account or the commissions that will be received for selling products.

Each client has his or her own mix of needs so we derive our fee from a combined picture of the portfolio we manage, the degree of complexity of their tax situation, and the depth of work necessary for comprehensive financial life guidance.

For instance, if you’re retired comfortably with low financial life guidance needs, you’ll have a much simpler situation to advise than a young family in a high tax bracket with stock options and college to plan for, or someone with a pension in a foreign country.

If you’re a young, single professional this is not going to be a service that costs you $6,000. Depending on your income, it’s probably going to cost you a couple of thousand dollars. Compare that to your cell phone bill which likely costs you almost $2,000 a year. Your phone is essential to modern life, and certainly nice to have, but it’s an expense and not an investment. It won’t help you grow your wealth or help you reach your financial goals.

What will help you grow your wealth is sound fiscal wisdom and a guide to regularly work through it with you. A financial life guide focuses on what’s important in your life and how you’re going to achieve it.

If your situation is simple you’re going to get top notch advice and it’s not going to cost you a lot. And if your situation is complicated, it’s going to cost you more, but the return is going to be much higher.

For our client Bryan*, wealth management was the need he was conscious of when he hired us. But as we built a trusted relationship over time, we learned that it was human capital growth that he wanted (and needed) most. Bryan wanted the time and space to be a human being, a husband and a dad, not just a human commuter/Wall Street guy. But he needed someone with a vested interest in him and not just his assets to help him uncover this desire. Read more.

For Bryan a $50,000 spend over five years enabled him not just to manage his money wisely, but to transition to a better career, and as a result, a better life. He needed advice based on a holistic view of his finances, his goals and his family - not a product sales pitch.

Until the financial services industry learns how to help clients lead lives rich in experience, as well as in money, their work is going to be too high in cost and too low in intrinsic value.

Invest for a higher return on your life. Sign up for a free virtual consultation with a Blue Blaze financial life guide.

Free Virtual Consultation with a Financial Life Guide

 *Client names have been changed for privacy.

Topics: Financial life guidance, Financial Services, Pricing