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How is your Advisor Compensated?

by | Oct 22, 2017 | The Ship's Wheel


Do you know how your Financial Advisor is compensated?  When I started in this business 20 years ago, the only way I made money was if one of my clients placed a trade.  I was young and at the time thought that was a normal way of doing business.  This is one of those times when I wish I knew then what I know now.  If your Financial Advisor only gets paid when you place a transaction, there is a conflict of interest that comes with every transaction.  As a client, you should be thinking “Why does my advisor want me to buy or sell this product?  Is this in my best interests?â€Â  I am not saying that all transaction based advisors are bad.  I am saying that being paid a commission to sell a financial product doesn’t seem right to me.  This is the difference between being a Broker and Registered Investment Advisor.  Brokers select among investments with different commission levels.  How do you know the product being sold to you isn’t being sold based on the level of commission it pays versus a product that might be better for you that pays a lower commission?  The problem is that you don’t.  Brokers who work for major firms are held to certain production standards.  The pressure to produce more commissions greatly influences the types of products that are sold to the client.  Brokers are rewarded with higher payouts and bigger offices based on how much they produce, not on how well the client’s portfolio performed.  It’s wrong.  It’s why I left that side of the business.

Registered Investment Advisors are paid to manage money.  We don’t sell products and we don’t get paid commissions.  All the money managed is charged a fee that is billed quarterly based on the amount of money invested.  We benefit directly when our client’s portfolios perform well and when our clients lose money we lose money.  The only way I make more money is by bringing in new assets and new clients.  The only way that is going to happen is if we do a good job managing our client’s portfolios.  Registered Investment Advisors are held to a higher fiduciary responsibility and cannot receive a commission by law.  Our main focus every day we come to work is to manage our client’s assets to the best of our ability focusing on the risk tolerance of each and every client.  Before hiring an advisor, make sure you ask how he or she is compensated.  If you would like to learn more about this topic or have your portfolio reviewed, please contact Jay Chapman, CFP® at [email protected] or call 772-320-9658.

Am I eligible to Convert my Traditional IRA to a Roth IRA?

Converting your Traditional IRA to a Roth IRA can be one of the best financial decisions made when saving for retirement if done correctly. Prior to 2010 there was an income limit that restricted the conversion to a Roth IRA if your (AGI) was over $100,000. As of 2013, the income limitation does not exist for a conversion, but it still exists for contributions. This does not mean it will not come back in the future, but for 2013 and beyond anyone can convert an existing Traditional IRA to a Roth IRA regardless of income.

For example, someone has a Traditional IRA with $350,000 invested, that IRA can be converted to a Roth and all the taxes need to be paid for the tax year the conversion was completed. After converting to a Roth, the money grows tax-free. Paying the taxes on this money now might sound like a tough pill to swallow, but the potential tax savings down the road can be significant. Wouldn’t you rather pay taxes on $350,000 now than pay taxes on $1,000,000 in the future? One of the keys to doing this correctly is paying the taxes with funds outside of a qualified plan. Paying the taxes with money from the IRA defeats the purpose and will negate the full tax saving potential.

This is just one example of completing a Roth conversion. You can do partial conversions as well. This means you do not have to convert the entire account. You could develop a strategy of doing partial Roth conversions over multiple years. The key is to consult with your tax advisor or accountant to make sure the conversion will not put you into another tax bracket. Every dollar you convert is taxed at your ordinary income tax rate. This strategy works best for younger investors who have longer to allow the money to grow and compound. It can also work well for an older investor who is in a low tax bracket. Another reason to convert to a Roth is that Roth IRAs are not subject to the Required Minimum Distribution after you reach age 73. For those of you out there that do not plan to use your IRA money to live this can be a huge advantage when it comes to passing along your IRA to your beneficiaries. Roth IRAs continue to grow tax-free after the conversion and after you die. There are distribution requirements for the beneficiaries, but the distributions are tax-free as well.
This strategy might not be right for everyone. I would advise you to consult with a Certified Financial Planner™ or your tax advisor prior to taking advantage of this potentially large tax savings. One of the best times to complete a Roth conversion is when the value of your Traditional IRA has fallen due to a market correction like we experienced in 2022. If you have questions on this article or would like to schedule a free financial review. Please contact Jay Chapman at 772-320-9658 or email [email protected].

Jay Chapman| CFP®

Jay Chapman| CFP®

Founder

Jay Chapman, CFP®, is founder of Chapman Capital Advisors, as a member of the advisory team. He has over 20 years of experience in the Financial Services industry.

Will Thompson | CFA®, CFP®, AIF®

Will Thompson | CFA®, CFP®, AIF®

Advisor

Will provides the in-house expertise of CFP®, CFA®, and AIF® that is uncommon for boutique firms.


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