One of my father’s favorite sayings was “there is no free lunch.” As much as I tried to prove this wrong over the years, I admittedly learned in business – - the hard way a few times – - that there’s typically a catch to just about everything that’s “free.”
Knowing that the brokerage industry is famous for the many ways it creatively generates revenue streams from products and services, I thought about the aforementioned truism with a recent industry news column about a brokerage firm announcing “100% payouts” on fee based business. Even among the least suspecting of industry participants, this type of a claim raises questions, if not a big red flag.
For anyone who has ever managed a broker-dealer, you know that 100% doesn’t add up to 100% in broker-dealer land. There all sorts of ways firms play games with their math to create the illusion of higher payouts. Marketing allowances, revenue sharing, mark-ups on administration, ticket charges, postage and handling are just a few ways brokerage firms generate extra income to cover their high payouts. When one adds it all up, you have to wonder why b/ds would go to such an extreme measures. Why not just charge a fair and competitive rate for the services provided? Well, the answer is as elusive as the word “transparency” tends to be in the broker-dealer world.
One of the most refreshing aspects of the RIA business model is that there’s an appreciation for, and reality to the costs of operating a business. Perhaps it’s the simplicity of a 1% fee annual fee and that there are fewer mouths to feed in the advice model that drive this thinking. Even the least sophisticated of fee advisors seem to have a greater appreciation for transparency that enables them to operate in complete alignment with their clients.
At Dynamic Wealth Advisors, we generate profits one way: with service fees received only when we service your fee based assets. There are no mark-ups, no marketing allowances or other “funny money” as I like to call it. Our interests are completely aligned with RIAs and IARs we serve. While the RIA business may not be a perfect model, from my view there seems to be much more understanding and appreciation for the value that industry participants like DWA are able to create for advisors and a lot fewer tempted by “the free lunch.”