Bench Talk: Does it Matter How Your Advisor Gets Paid?

 

Does it matter how your financial advisor gets paid? Before I answer that, I’d like to tell you a quick story about a movie I recently saw.

The Big Short came out a couple of months ago. In it, it examines a couple of characters who correctly identified the housing bubble from a decade ago and bet against it. One of those characters, Mark Baum, is a hedge fund manager who goes around conducting interviews to confirm whether or not there really is a housing bubble.

The first person he interviews is a couple of mortgage brokers who bragged to him about how much more commission they make by pushing the aggressive adjustable rate mortgages rather than the more conservative FHA government backed mortgages.

Then he goes and he meets with an investment banker who packages those mortgages together and sells them off as bonds to other investors. That person reveals that, yeah, they kind of mix in the good mortgages and the bad mortgages, but you’re still diversified, and so they’re safe.

Then he meets with the rating agencies who, after some prodding, reveals that all these bonds get triple A ratings because, well, if they don’t give the investment banks the triple A rating for their bonds that they want, the investment banks are going to take their business elsewhere, and they will lose out. So, they have to give them the triple A rating. But, ultimately, they’re still safe because, well, you’re diversified.

In each of these examples, the person is getting paid by someone out here, the third party. The mortgage broker, for example, is getting paid by the lender, but they’re obligated to the person borrowing the money who’s going to go buy the house. Same thing with the investment banker and the rating agency. They’re being paid by the investment bank, even though their obligation is really to the end investor, who is going to be buying those bonds.

Do I think it matters how your financial advisor gets paid? Absolutely. That is exactly why we are organized as a Fee-only advising firm. You know exactly what we are getting paid. We don’t collect commission of any kind.

I hope someday you’ll come sit down with us and we can talk about your situation and how we might be of service to you.

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