THE VALUE OF INDEPENDENCE
Not all advisers can offer the best options for you. Some have company products to sell, and some only have access to a limited number of options. How can you spot them?
Advisers in Captivity
Many advisers affiliate with one large company (called “career” or “captive” advisers). These companies have brand recognition, ad budgets, and impressive offices. If you have seen a TV commercial for a company, odds are they fit in this category.
To pay for those expenses, these companies provide their advisers incentives to sell you their products. Some require minimum sales “production” and some provide perks to advisers for reaching sales goals. Some limit access to certain products or make it more difficult to use a product outside of their firm.
One reason I started III Financial was to free myself from these constraints.
This simplifies the adviser/client relationship because there are no competing interests involved.
Declaration of Independence
My independence as a financial planner levels the playing field for you. With only my clients paying me, no recommendation creates a financial incentive. I am free to help select the best options for you, regardless of the company offering the right solution.
You should always know how an advisor gets paid, if they get commissions from selling you financial products, and if anything limits their ability to offer financial products or solutions!
WATCH OUT FOR BOZOS AND DISC JOCKEYS
No Experience Necessary
The bar is low to call oneself a “financial adviser”. Some stockbrokers executing trades all day use the title. Insurance agents may use the title because the title “insurance salesman” sends many people running. And some comprehensive financial planners use the term as well. (It has been observed that nail technicians require more training than starting to use the term “financial advisor”. Ouch.)
For each job, the amount and type of training required varies greatly. What the title “financial adviser” fails to indicate is the level of experience and knowledge the adviser possesses.
The Certified Financial Planner™
Though many professionals call themselves “financial advisers”, those holding the CFP® designation have completed extensive training and experience requirements and are held to rigorous ethical standards. Only those of us who have studied long hours, completed the 6 courses, and passed the (at the time, grueling two day 10-hour) test are authorized to display the CFP® marks. It is estimated that only 10%-20% of financial advisers hold this designation.
HOW IS THE PIPER PAID?
“What am I paying and for what?” sounds like a simple question, yet many people find their adviser dancing around the issue. The most common methods of compensation add many conflicts. Also, costs can be like termites: you may not see them but they can still do severe damage.
Commissioned-based advisers may provide advice for what appears to be little or no cost. Only if you buy products from them will they get paid. How could this work to your disadvantage?
Different products and companies pay differing levels of sales commissions. Minimum quotas and sales contests on certain products or “production” can create conflicting incentives. Even trustworthy advisers can fall prey to the external influences!
Mutual fund sales commissions often cost 3%-5% of the investment when you buy them. The ongoing expenses are often 0.50%-1% every year (moving $500k this way could cost you up to $25,000!). Brokerages and mutual fund companies rewards the salesperson up front for “making the sale”. There is little financial incentive for on-going support.
Did you know that a “broker” and an “investment adviser” are two different roles under the law? A broker has a legal duty to the broker-dealer they work for, not the client. By law an investment adviser must put the client’s interests ahead of his own. To learn more, simply Google “financial fiduciary standard”.
Asset Fee Conflicts
Advisory fees, often referred to as an “Asset Under Management” fee, usually get disclosed as a small percentage. The argument for it is that if the value of your account goes up, then the adviser benefits. If the value drops, then the adviser shares the pain. Why would this model cause problems?
Several important decisions at retirement affect the size of your nest egg. Should you pay off your home? Should you exchange assets for more guaranteed income? Should you take the lump sum from your pension? The choices you make could change your account balance and reduce the adviser’s compensation!
Let’s compare two clients. Client A has a straightforward financial situation. Client B deals with inheritances, complicated family dynamics, and estate planning issues. Why charge them the same amount for advice just because they have the same account balance?
Penalize Wealthier Clients
Why should a client with $5 million pay so much more than a client with $1 million? More money does create some extra complexities. The complexities are not enough to justify such a price difference. Does your doctor charge you based on the value of your home?
The Solution: Fixed Fees
Level, fixed fees can be set based on the complexity of your situation, not the dollars in your account. Advice can cover areas of your financial life where the sale of products is not needed (like Social Security or tax planning).
On Your Side
Without compensation from any entity other than you, an adviser with a fixed fee has no incentive to suggest any solution other than what they see as the best for you.
A flat fee for continuing comprehensive financial planning AND investment advisory needs gives you a known and non-variable cost to your advice. No hidden fees, no surprises, no meter running with hourly charges.
For many clients, a flat fee combined with the use of very low expense investments cuts their annual costs by 50% or more compared to an AUM model! What could you do with that amount of savings staying in your accounts?
How Much Difference Can This Make?
Many Many Certified Financial Planner professionals charge 1%+ of your asset value. They also often use costly mutual funds.
Over 20 years, the difference between this fee and a fixed fee can be significant! In this case a $2,000,000 portfolio would forgo $2 million more in profits. That comes from the additional $900,000 paid in fees to the median AUM adviser, and the loss of growth from that money.
Assuming 8% annual gross return, 1% AUM advisory fee deducted quarterly, and 0.75% mutual fund expense ratios. III Financial using $2500/quarter fee, increasing $250/quarter every 2 years, and 0.2% fund expense ratios.
You may be surprised that some of my beliefs are not universal among advisers. What is my secret sauce? How do I charge my clients?
If you missed it the first time, circle back and learn what you can expect when we work together!
Interested in a free report helping you finish your advisor evaluation? Or would you like to get in touch and move forward?