Ray Dalio explains how the economy works

Perhaps a little over-simplified, but an excellent explanation of how the economy works by Ray Dalio.  

Credit is not created out of thin air, as he says, but by those willing to save instead of spend (except for demand deposit accounts, but that’s getting into details of how banks create credit apart from saving/investment, and still depends on people being willing to save/not spend).

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Ray Dalio explains how the economy works

Fee-only in name only

If you receive advice or asset management services, ask how you provider is compensated.

Some asset managers are compensated as a percentage of assets under management.  This is how most mutual funds work (and how I’m compensated).  This compensation is referred to as a fee.

Some asset managers are compensated by a flat fee.  They charge by the hour or a flat rate $500) for services provided.  This compensation is also clearly a fee.

Other financial planners or advisers are paid commissions.  In such arrangements, the professional is compensated when a transaction occurs.  For example, when you buy or sell a stock or bond, the stock broker gets a commission for the trade.  Or, when a financial planner recommends certain mutual funds, they receive a sales commission from the mutual fund (frequently as high as 5% of your money).  Or, when an insurance agent sells you life insurance or a variable annuity, they are paid a commission for the product they sell you.

Fees tend to be more transparent than commissions.  It’s very hard for advisers or managers to charge fees without clients knowing because they send a bill or the client has to write a check.

Commissions, however, are harder to see.  When a mutual fund pays a sales commission, the client may not even realize that such a fee has been paid.  Commissions must be disclosed, but you must read the fine print and it’s not as obvious as an invoice.

This distinction is not simply academic.  Advisers who claim to be fee-only are seen by many investors as more clearly and justly compensated, so many seek out “fee-only” advisers.

Shadier planners and advisers, however, have caught on to this designation and used it against clients.  It turns out many supposedly “fee-only” advisers are actually compensated with commissions.  See Jason Zweig’s article in the Wall Street Journal from last weekend.

Not surprisingly, many of these “fee-only” advisers work at brokerage houses.  Surprising to me, many carry the CFP or Certified Financial Planner designation.  So much for professionalism.  

If you don’t know how your planner or adviser is compensated, ask the question.  It may seem like an $800 fee for a plan is good money spent, that is until you find out your “planner” earned a $5,000 commission when you invested $100,000 in the mutual fund they suggested. 

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Fee-only in name only