What do cream-filled cookies and financial advisors have in common?

If you grew up with a sibling, you likely learned about conflicts of interest the hard way. I remember one instance where my mom said we could split the last Oreo cookie and my brother gave me the half without the cream filling – I was mortified. In situations like that, you can see how easy it is for a decision maker to prioritize themselves over the other person. Technically there’s a number of ways to half a cookie, but finding a fair split is another matter.

When it comes to financial advisors, consumers are tasked with choosing someone who will treat them fairly and an important part of this is understanding inherent conflicts of interest.  

There are many, many titles in this industry: money coaches, financial consultants, advisors, brokers, planners, wealth managers, and so on. And since there aren’t legal requirements associated with using these terms, it can get confusing. To help sort it out, advisors have started to identify themselves by their pay structure rather than their title, here are the main three: 

Fee-only: These professionals only earn revenue through the fees charged to their clients. This could be a one-time fee or reoccurring, but it’s structured to give transparency to the process. This way, clients see the totality of profit they generate the advisor and are able to compare it to the value the advisor gives them in the arrangement. Think of it like watching your sibling cut a cookie in half and then receiving your portion. You’re able to judge if it’s a fair split, because you see what they are getting out of the deal as well. 

Fee-based: These advisors earn revenue through fees charged to their clients, but they also earn a commission based on the trades they put through for them. Going back to our first example, let’s say your mom sends you into a bakery to buy a cookie to split with your sister. You get a chocolate chip cookie and the baker gives you a free lollipop as well, which you pocket for later. Technically, you fairly split the cookie with your sister. But since no one asked you about the lollipop, you keep that for yourself.

Commission: These advisors don’t charge their clients a fee directly, but deduct some of your profits for themselves instead. Let’s say your mom asked you to bake a batch of cookies for a party and the recipe makes a dozen. So instead of making 12 cookies, you divide the dough into 13 cookies so you can have one for yourself.  

Every advisor has conflicts of interest, regardless of their fee structure, so it’s important to ask and understand how those impact your relationship. One of the best ways to do this is to find an advisor that works as a fiduciary. This means that they are legally vouching to put your interest in front of their own in the relationship. That doesn’t mean you’ll get to work with them for free, mind you, but it does mean they’ll do their best to disclose what conflicts of interest might impact your arrangement.  

At Great Lakes Investment Management, we try our best to put you first by disclosing our fees and what value we can offer you in return. We believe that by acting as a fee-only firm we’ll build a trusting relationship with you and be able to offer you the guidance that fits your needs.

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