Below is an excerpt from an email I received from a financial advisor who regularly reads this blog. His comments were in reference to last week’s post which highlighted a few sources for finding a fee-only investment advisor or financial planner:
Regarding fee-only advisors, I really hope you will highlight Jonathan Chevreau’s comments which were posted here http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/02/12/where-to-find-a-fee-only-planner.aspxYou know as a former advisor that a “fee-only” advisor who charges their client 1.5% of assets is no different than the majority of your former colleagues who would happily offer the same deal.Drill down into the numbers and I think you will find that the vast majority of the advisors listed here http://www.canadianbusiness.com/my_money/planning/article.jsp?content=20080310_110229_7096are actually more expensive for the typical client. Ok, fine to say you charge 0.5% on assets over $2,000,000 – but the vast majority of clients are in the $250 to $500K range. It’s a bait and switch - advertise a very low percentage of assets for the one or two accounts they have that are big, and then charge the majority of their clients more than they would pay with most brokers.I really like Jonathan’s article – but I will bet you that very very few of the advisors listed in Duncan Hoods article will ever reference it.Keep up the good work.
It’s a good point. A TRUE fee-only advisor relationship is one in which they charge strictly by the hour, or a flat rate, and there is no management of assets (or custodianship). I see that there are some fee-only advisors who further calculate their flat fee based on how large your portfolio is – but only in extreme cases does that really change the level of complexity of the financial planning.
So, if you are looking for someone to work on your financial planning and you are looking for an unbiased professional who earns a living through hourly or flat rates, make sure to look for a fee-only “financial planner” whose rates do not change with the size of your assets (if your situation is more complex, it will take longer to figure out and the charge will be higher, so you are not short-changing them).
A fee-only investment advisor, who may change their fees based on how large your portfolio is, is not necessarily a bad thing – you just have to understand the value you are receiving and what you are paying for.
There is enough grey area that there are those out there (perhaps unwittingly) who are taking advantage of the good will associated with the fee-only name. Certainly, there are more blog posts to discuss the ins and outs of “fee-only versus fee-based” to come!
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About Preet
It never occurred to me before that some advisors who call themselves “fee-only” would charge a percentage of assets. Maybe we need a new term that would be harder to play games with. I suggest the “hourly-rate only” (HRO) financial advisor. If it catches on, we can wait for the brazen way that some financial advisors will call themselves HRO and try to collect commissions, trailers, and percentages of assets anyway.
“you just have to understand the value you are receiving and what you are paying for.”
Yes, that is the $64 question. (Does that date me?)
What does the investor get? What do financial planners offer besides trite advice? I’m not mocking the industry. I really want to know.
What training do they receive?
Is there a specific degree with a major in financial planning?
Do they ever discuss derivatives with clients?
Thanks.
There is also the issue of client choice- many clients WANT to pay commissions for a simple, buy and hold strategy, the same way that some clients WANT to pay and asset-based fee and some WANT to pay a flat planning fee.
Financial Advisor: Based on my limited experience in talking to owners of mutual funds, at least half of them aren’t even aware that they pay their financial advisor. This makes it meaningless to talk about what form of fee they WANT to pay.
Here is a point that often gets overlooked regarding hourly versus percentage of asset fees. Consider a fee-only advisor who is paid an annual fee of a $1,000 versus another advisor who gets 1% of assets on a $100,000 portfolio – who do you think sweats more to make sure those assets grow?
Wow, the financial industry pulling a bait and switch? I am stunned!
Slightly off point but the industry really should be regulated better to differentiate between financial ADVISORS and financial salespeople.
The question is what is the financial advice worth? I know great advisors that each use the various different fee-structures.
The common thread is they inform their client about how they are compensated and deliver great advice in return.
The fee-structure is not a key determinant about the competency of an advisor. There are good advisors who will use deferred sales charges on mutual funds. The reason being it adequately compensates them to provide advice for less-affluent clients.
I don’t see a problem with that if the client understands what they are paying and what services they are getting in return.
I’ve also seen an advisory firms charge 1.8% to put their clients in a portfolio of buy and hold ETFs.
Am I a fee only advisor? Under some definitions I am not. Regardless of how the fee is calculated though, what I am is unbiased on investment selection because I do not sell them. Being unlicensed, I do not work for a product machine, which would be required if I wished to be licensed (If we are looking for better industry terms, I would certainly like a substitute for “UN-licensed”). The important issues are that I work for my clients at a PRE-AGREED rate and I am uninfluenced by a master that wishes to dictate product choice. Objectivity and unbiased advice are the goals. The fee makes it possible for me to stay in business and provide this alternative, however calculated. A good example of this untied objectivity is I often advise clients that have outgrown mutual funds (and you do out grow them) to then move to an alternative strategy. No mutual fund company nor rep has a system to move clients up as they grow, because the rep would lose the income from that client and cannot follow the client into the new space because of licensing. I organize that move up for them. THat is objectivity that is possible because my remuneration is unaffected. Now back to the question, “Am I a fee only advisor? I ask my clients to choose, between a one off plan ($3000 for Retire, Tax, Invest and Estate)or per hour at $160 minimum OR an ongoing relationship of $90 per couple per month BUT for monthly they MUST go to an acceptable (by me) broker, mutual fund rep or ICPM, that charges a percent of assets. Why? because a plan is worthless unless the implementing investment agent will follow the plan. I also do very few one off plans. It does not encourage the clients to make financial planning a ongoing excercise and seek advice at all changes during their life. It ignores the need for constant questioning and reassurance.
Gord