The Fiduciary Role
To better understand the role of the fiduciary advisor as it relates to the investor, please read our complimentary executive summary.
→ Read more about the fiduciary role (PDF)
Why pay a fee for investment advice and management?
We charge our clients a management fee to supervise their portfolio. This is in contrast to investment advice offered by financial advisers who receive commissions related to transactions and product sales. (Though the term has become unfashionable, commission-based advisers are technically considered “brokers” under the regulatory laws.) This contrast may beg the question: Am I better off paying once in the form of a commission compared to paying an ongoing management fee? In the early days of Linscomb & Williams, we acted as brokers and received commissions for investment transactions. In 1985, we decided our clients would be better served if we changed to the fee-based model. We believe our clients are best served by this model for several reasons:
- Foremost, fee-based compensation eliminates an unavoidable conflict of interest inherent in the commission method of compensation. The broker is incentivized to create activity in the portfolio and must forego compensation to advise in favor of holding an existing position. The fee-based adviser does not face this conflict of interest. Under the professional standards regulating Certified Financial Planners engaged in financial planning, fee-based advisers are considered “fiduciaries” which is a higher legal standard of business conduct than the “suitability” standard applicable to commissioned brokers. In recent years, many brokers have begun offering some services for fee-based compensation which blurs this distinction. When in doubt, ask an adviser to represent in writing to you whether he or she is acting as a “fiduciary”.
- Commission-based advisers must, by law, be affiliated with a brokerage or insurance firm. In almost all cases, this creates additional conflicts in the form of investment selection. Most brokerage firms create proprietary products that can be sold by their brokers. Since these products offer additional income potential to the brokerage firm, they may offer special incentive compensation that encourages their use by brokers. Needless to say, such incentives may cloud the broker’s judgment when making a recommendation. By contrast, the fee-based adviser is compensated by a single fee calculated on portfolio value. It is unaffected by the choice of particular investments in the portfolio. The incentive is to increase the value of the portfolio, not to favor particular investments within it.
- The fee-based method of compensation is a “pay-as-you-go” system, in contrast to commissions which represent an “up-front” method of paying for advice. We can testify from experience that this contrast affects how an adviser prioritizes daily activities. Because of up-front compensation, brokers have a particular economic advantage to acquire clients who bring new assets which generate commission income or to turn over investments in the portfolios of existing clients. Of course, fee-based advisers also like to acquire new clients. However, compensation associated with new clients is earned over time, not up front. The economic incentive to fee-based advisers is to retain clients. One can draw the logical conclusion about which method likely best serves long-term clients. We believe the commission-based system emphasizes marketing to new clients over taking care of existing clients.
None of this is offered to impugn the integrity of those who operate within the commission-based system. However, while there are many honest brokers, overcoming these conflicts of interest can often present a quandary. We believe charging an ongoing management fee for advice and portfolio supervision more closely aligns our clients’ interests with our own. As fiduciaries, we constantly strive to eliminate conflicts of interest wherever possible.