How I Became A Financial Advisor
A big reason why I became a financial advisor is that I had to teach myself about investing, and was lucky enough to start a Roth IRA when I was 19 years old. Then I started up my Thrift Savings Plan while I was in the Marines at 20 years old, the federal government and military’s version of a 401k.
After I got out of the military, I moved to Washington, DC, in 2012. And one of the questions I asked people who worked for the Federal Government was how their TSP was allocated. I asked this because back in the day, the fund that people were automatically put into was the G Fund, which is the most secure fund that people can invest in but offers the lowest long-term growth opportunities.
As of 11/12/2020, the 10-year return for the G Fund has been 2.23%. This means that $1000 invested today will double to $2000 in 32.28 years. While the Lifecycle 2040 fund has had a 10-year return of 9.41% and $1000 invested today will double to $2000 in 7.65 years roughly. (Rates of Return are not guaranteed and do fluctuate)
I saw that this was a huge problem, and I wanted to prevent people from making money mistakes, like keeping all their retirement dollars in the G fund. It would be better for a diversified fund that would give them more growth opportunities. So I decided I would quit my federal job and become a financial advisor after I got my degree in Economics.
The Different Types of Financial Advisors
I decided to do some internet searches on ways to find a job as a financial advisor, and only found one type of firm that was hiring for the most part. These were hybrid firms that were broker-dealers and registered investment advisory firms.
I ended up at one of these firms, and I thought it was the only firm out there in 2014. Later I found that there are three different types of financial services firms, which are:
Commission-Based (Broker-Dealer)
- Make their money by selling a financial product like annuities, mutual funds with a sales charge, and insurance products like life, disability, and long-term care.
Fee-Based (Registered Investment Advisors)
- Make their money by charging a percentage of the account value to manage the investment account. This fee usually ranges from 1-2%
Fee-For-Service (Registered Investment Advisors)
- Make their money by charging for the advice that they give. The hourly rate is usually between $150-$300 per hour. Project rates usually start at $1000. And subscription rates start at $100 per month.
Now a firm can be one of these models, or it can be a combination of the three, but a firm will usually decide what its main focus will be.
How I See The Industry
My first firm allowed a financial advisor to do any one of these three services. Still, there was an incentive to be a commission-based advisor and sell financial products because bonuses were more weighted towards insurance sales. Certain insurance products had bigger payouts than others. The fee-based was also incentivized since the company only had a few investment companies to choose from, and the Assets Under Management model offered a bigger payout to its advisors.
There is nothing wrong with these models if it’s the best option for someone, but I felt that I couldn’t be a fiduciary to my clients by being a commission-based or fee-based financial advisor. I think the fee-for-service model is the most transparent to my clients and can help the most folks out.
The only fee I get paid is based on my clients’ monthly fee for ongoing financial planning and advice, without having to pressure folks to move money to me to manage or sell a financial product. I also like to spend more time with my clients and coach them through their different financial questions and needs, in which my monthly subscription model offers this service.
The commission-based model is very transactional, and a financial advisor only gets paid when they sell a financial product. So there is little incentive for the financial advisor to do more work outside of the sale, so people are not contacted very much, or much work is done after the sale. I talked to other people in the industry, and they said clients are usually only contacted when a sale can be made when the firm is focused on commissions.
With a fee-based model, it only really works if someone has a lot of money to invest, which is why a lot of firms have $500k minimums to work with them. A firm that charges 1.5% on an account that is $500k charges $7,500 per year in fees. Robo-advisors will manage money for 0.25%, so less money is going towards management fees and more towards people’s investment accounts.
Financial advisors have minimums or are very transactional because they have expenses to be paid for. They have to pay for office expenses like rent, supplies, staff, and other business-related expenses. There are also many regulations and compliance that financial advisors have to go through that take up a lot of time, and if the revenue is not there, it doesn’t make sense for them to work with people just starting and need advice.
This is why I like running my own virtual practice on the fee-for-service model. I currently live in Medellin, Colombia, and my business expenses are about $800 per month since I run all my meetings virtual compared to the $3,500 per month in Washington, DC. Also, I don’t take the client’s social security numbers or account numbers, so their information is more secured.
Living in Colombia is also very cheap as my living expenses for things like rent, transportation, food, cellphone, and health care are about $1000 per month. This also allows me to work with all types of people.
Why I Do What I Do
I love working with millennials because I like seeing them grow when I give them a financial plan, and they start implementing the plan. This way they are more likely to be financially secure in the future.
Doing what I do now for financial planning, was not feasible at my last firm, and this is why I made the move into the fee-for-service model and conduct all my meetings over zoom.
My goal is to help more folks become millionaires instead of chasing them. This is why I have the set-up I have now, which allows me to work with folks who make $50,000 to ones that make $300,000 a year. And in order to help all folks, I created my own firm and moved to someplace where it’s cheap like Medellin, Colombia.
There is no wrong way to work with a financial planner. Just make sure it’s the right fit and that you know the deal before you accept the deal. I’ve seen people put into bad financial products that we’re not the best for them. When I work with clients, I want to make sure that I’m giving them the best advice and service, and I feel I can’t do that outside of the fee-for-service model. This way, I can sleep better at night, and so can the people I work with.
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