Transparency is a highly valued attribute that is routinely promised—and frequently undelivered. In fact, it often seems that the more loudly transparency is touted, the more opaqueness is practiced. Perhaps Shakespeare’s famous line from Hamlet, “The lady doth protest too much, methinks,” is a fitting warning.
Transparency and honesty are not the same, though both are essential for establishing trust. Transparency is openness about what one does, thinks, or believes. It can result in exposing dishonesty. Honesty is sharing something one believes to be true. Choosing not to share everything is not necessarily dishonest, but it is not transparent.
Most of us would agree that honesty, transparency, and trust are critical ingredients to engaging a financial advisor. No one would knowingly give their life savings to be managed by someone untrustworthy. Yet it happens every day. A convincingly created perception of trust, honesty, and transparency is not a guarantee that they exist.
Fee-only financial planners, who do not receive commissions or kickbacks from financial companies but only charge for advice, are inherently held to a high standard of transparency when it comes to disclosing their fees. There is no place to hide: every charge must be disclosed and communicated to their clients.
A fee-based financial planner earns both fees and commissions. The term “fee-based,” coined to sound as close to “fee-only” as possible, is inherently not transparent. These advisors are required to disclose that they receive commissions, but it can be a daunting task for consumers to know how much those commissions will be, and rarely are they plainly disclosed, especially in terms of dollars.
I know fee-based advisors who routinely tell prospects they will do financial planning for 25% to 50% of the fee charged by a fee-only planner. Is this honest? Yes. Their fee for financial planning can be much less. Is this transparent? No. What is not revealed is the amount of the advisor’s compensation that comes from commissions on products they will sell to the client. A national study done by Inside Information in 2017 found that clients of the average fee-based advisor paid over 50% more than they would pay a fee-only advisor, even though they thought they were paying less.
I recently had such a fee-based advisor claim that “by receiving a commission, they can use superior investment products not available to fee-only advisors.” That statement may sound good to an unsuspecting consumer, but it is neither honest nor transparent.
If an advisor says they accept commissions on anything, it’s time to ask a lot of questions. You cannot rely on verbal promises when it comes to trusting someone with your money. You must do a detailed evaluation of any product you are being sold. That means doing some limited homework, asking some probing questions, and getting the answers in writing. Be sure, for charges stated in percentages, to have the advisor clarify what that equates to in dollars and cents.
It is crucial to determine the amount of conflict an advisor has from receiving commissions. Ask the advisor to sign a written statement disclosing their company’s gross income for the previous year, broken down by commission revenue and fee revenue. A transparent advisor will have no problem doing this. One who glosses over or refuses to provide this information may be honest in many ways. They are not being transparent.
Competency, experience, education, and specialization all matter in a financial planning relationship. Yet, if an advisor is not transparent about what they charge and how they make their money, does it matter how competent and experienced they are? The most critical issue is to completely understand how—and how much—the advisor is compensated.