Finding the right financial advisor is a convoluted mess. More investors are demanding to work with a fee-only financial advisor —Advisors subject to the fiduciary standard who do not receive commissions or kickbacks. Good news: There are a growing number of fee-only financial advisors to choose from.

Bad news: Almost all well-known, nationwide Wall Street firms are not fee-only by any means. This means you have quite a task on your hands if you’re seeking sound financial advice. You’ll need to avoid almost any well-known firm you’ve heard of, and you’re going to have to choose between a dozen+ much smaller firms.

Two things have happened to cause this:

  1. People Google everything before making a buying decision. Result: People want fee-only advice. So, they stay away from large national Wall Street brands.

  2. A mass exodus of financial advisors leaving large firms to start their own firm. The amount of fee-only Investment Advisors have absolutely exploded nationwide.

When you Google how to find a financial advisor, you quickly find that you should only work with a fee-only financial advisor (see the graphic below). It’s not just Google telling you this. It’s The Wall Street Journal, The New York Times, Forbes, Barrons—it’s everywhere. All of these outlets have amplified the importance of finding a fee-only financial advisor. They often give a list of questions you should ask any potential advisor you might hire.

Well, almost every nationwide insurance & investment company is not fee-only, and they fail the most basic list of questions The Wall Street Journal says you should ask them. These established Wall Street firms pay their advisors different amounts based on the products they sell you. They receive kickbacks from fund companies for stuffing certain funds into client portfolios (have you ever wondered why your managed account at a big firm includes 40 different funds?). In some scenarios, they blatantly sell you things that can be very harmful to your future net worth. The history behind this can be found in the next section.

“I honestly think that if you are a financial consumer and you are dealing with a brokerage house, you are just out of your mind.”
-The New York Times (link in footnotes)

If you’re a consumer looking for financial advice, you can imagine why this turns you off from these large firms.

The decision a financial advisor makes to work in a firm like this is entirely voluntary. So, the question to ask any advisor at those firms is, “Why did you voluntarily choose this conflicted model instead of choosing to be a fee-only fiduciary?”

There’s not a good answer to this question.

The follow-up question that investors then ask themselves is even more damning: Why would I ever hire a broker or hybrid advisor to handle my wealth?

As you read this, you can see why we’ve seen a huge exodus of advisors leaving large brokerage firms to be fee-only. It used to be an advantage to win clients by having a big brand name on your business card.

It’s certainly not an advantage now. In many ways, it’s a liability.

How did we get here?

The Investment Advisors Act of 1940 is the largest influence on the environment we have today. Three critical pieces came from the 1940 legislation (and subsequent tweaks to it):

  1. It defined who is an Investment Advisor and who isn’t

  2. It created a substantial legal standard for investment advisors to follow

  3. It created an exception for professionals whose investment advice is incidental and not a primary part of their professional services (example: CPAs)

One of the subsequent tweaks was adding brokers to the exception in #3.

That’s a big deal. That’s the reason why hiring an advisor today is a convoluted mess.

Why have all the large nationwide brands resisted a transition to fee-only (left)? Well, a huge portion of their revenue comes from selling stuff that isn’t in your best interests to buy. This isn’t just a one-time problem, a huge portion of their ongoing revenue comes from their current business model.

Since brokers were added to the list of exceptions in #3 above, they are fully exempt from operating under the rules and fiduciary standard laid out in the 1940 Investment Advisors Act.

Instead, they have been able to historically claim that any investment advice they happen to give to clients is incidental to their primary function: selling investment and insurance products.

Another fascinating element to all of this: these firms are able to call their “financial advisors” whatever they want. Anything from “Senior Wealth Manager” “Financial Planner” “Financial Consultant”

Large Wall Street Firms can adopt these names to convince the public they are giving advice. However, when large Wall Street firms find themselves in a court case, they quickly jump to the other side. They adamantly claim they are not in the business of giving financial advice. They claim their business is purely sales.

Recently, there has been a huge push to pass new legislation that would create a strong fiduciary standard for every financial services professional. Traditional Wall Street firms hate this idea.

Even crazier, many of the largest firms continue to spend millions lobbying Washington to protect their conflicted business model and avoid a sweeping fiduciary standard.

To put it bluntly: large Wall Street firms have historically evaded a fiduciary standard. This has allowed them to sell things to their clients that are not in their client’s best interests. The cherry on top: these firms have then spent millions to lobby DC against their own clients!

The Result? Fee-Only Firms Have Exploded in the 21st Century

While Wall Street firms have built enormous businesses off of practices that have cost consumers, it’s also provided a substantial market opportunity.

The top reason I left my large brokerage firm to be fee-only is because of the reasons above. I would never encourage my parents to go to any firm that is not fee-only. I believe it’s non-negotiable. If I’m going to have families entrust their life’s savings with me, I have to be a fee-only financial advisor.

With that being said, there’s also an enormous business opportunity being fee-only.

10-20 years ago, there were very few fee-only investment firms. What changed? The cost involved in starting and operating your own firm has plummeted. In 1990, you might need well over six figures to start your own Investment Advisory Firm. Thanks to technology, you can do it on a small fraction of that today.

Remember the question above to ask any advisor at a large Wall Street firm? “Why would you voluntarily choose to be an advisor in a conflicted business model that’s bad for clients?” Well, the answer 30 years ago was that it was the only option. Not anymore.

Discount brokerages have also played a significant role. T.D. Ameritrade, Charles Schwab, and Fidelity all offer their services as custodian for small investment firms. This is critical. You likely don’t want a tiny company managing all of your money on their own obscure platform. But if your money is instead held at a firm like T.D. Ameritrade and your advisor is fee-only? That’s a much better proposition.

This ignited a movement over the past 20 years. The number of fee-only advisors is booming. The advisor headcount at insurance, brokerage, and wirehouse hybrid firms is decreasing.

As this continued to blossom, the media took notice. Every major outlet seems to write a story every few months on the conflicts of interest traditional Wall Street firms have and horror stories from advisors selling bad products to clients.

This last development is what created the business advantage for smaller firms. If you research or Google anything about hiring an advisor, you quickly learn to avoid “fee-based” or commission brokers, and instead opt for fee-only.

Oddly enough, the market is still wide open for more fee-only wealth management firms. Every estimate I’ve seen still suggests that only 10% of financial advisors are fee-only (most are hybrid or dually registered). There are several hybrid/brokerage firms with more than one trillion dollars in assets. The largest fee-only firms are a tiny fraction of that.

I can attest to this firsthand. It’s a massive advantage for our firm when we talk to potential clients from Oil & Gas companies. The majority of our competition is not a fee-only financial advisor. Even better for us, they rarely have the tax and estate planning focus we have or our unique fee structure.

Simply put, we built our firm to be a fee-only financial advisor because we believe it’s a no-brainer. At the same time, it’s a huge opportunity and differentiator as we continue to grow.

How Does This Affect You?

What’s fascinating is how hard it is for the average consumer to hire a financial advisor as a result of these factors.

Handing your money over to be managed (or even paying an advisor without them managing your assets) is a big decision. With big decisions, we tend to gravitate toward companies and brands we’ve all heard of. But with financial advice, you have Google and almost every news outlet telling you to not do that.

So, what should you do?

You’re left navigating a dozen or more fee-only firms. Most of them being small, local firms. Here are some quick bullet points to help you navigate this decision.

  • I mentioned the list of questions to ask any advisor from The Wall Street Journal. This is a great place to start. This list basically protects you from hiring someone who will sell you an expensive life insurance policy or mutual fund you don’t need. If you’re already crystal clear on the difference between “fee-only” and “fee-based,” you can probably move on to the next point.

  • Your next objective is to find an advisor that specializes in situations like yours. If you need heart surgery, you wouldn’t go to a general physician. The general physician probably knows a little about heart health, but why would you ever choose them over an experienced, specialized heart surgeon? The same is true with financial advice.

    Our specialty is professionals and retirees from large Oil & Gas companies. It has little do with the business of O&G or petrochemicals. Rather, it has everything to do with the company benefits, estate planning intricacies, tax planning opportunities, and retirement strategies that everyone in this niche shares.

    Doctors typically make excellent clients for financial advisors. I have no interest in doctors and I would be surprised if one contacted our firm. They have the income and assets to pay us, but it’s not what we’re experts at.

    Instead, we’re interested in being the single best option for anyone from Chevron, ExxonMobil, Shell, Phillips 66, and others.

  • The next area of importance is figuring out the experience of the specific advisor you’ll be working with. If you have $5Million in assets, you probably don’t want an advisor whose largest existing client has $1.5Million.

  • The next question is whether you need a solo advisor or a team. If you have significant assets, you typically have significantly more estate and tax planning opportunities. It’s far easier for a team to execute on all of these things at a high level than one individual person.

    This is why I brought on a partner rather than staying solo. If you retire from Conoco Phillips or ExxonMobil, you have significant estate and tax planning decisions in your first decade of retirement (in addition to your investments and retirement income). A team approach is needed to serve clients at the highest level in these situations.

  • Cost. Your investment returns are directly impacted by the fees you pay. There are two ditches to avoid here.

    The obvious one is the high fee ditch. This is another reason why large hybrid firms are a bad choice. Research consistently shows that their portfolios are more expensive and underperform.

    The other ditch is the low fee ditch. You can go to Vanguard or Charles Schwab and have a remote CFP by phone and pay .3% or less. The problem here is they aren’t going to review your tax return, much less tell you exactly how much you should convert to Roth. They aren’t going to walk you through the estate planning process with an attorney. They aren’t going to map out your future Medicare premiums based on taking a distribution from your regular IRA vs. a Roth IRA.

    This is why our fee structure is unique. We’re aiming to avoid both ditches.

  • Lastly, if your advisor is going to be managing your assets, make sure they custody their client funds at a separate institution (think Fidelity, TD Ameritrade, or Charles Schwab). This is a significant measure that protects you from fraud. Remember Bernie Madoff? His scheme would have been virtually impossible had his client assets been at a separate institution.

Finding the right advisor is a big deal. Doing so can optimize your investments, help you navigate the tax code, and organize your financial life.

helping oil & gas professionals pay less taxes & retire comfortably

Have specific questions about your situation or how we might work with you as your fee-only financial advisor? Contact us here.