Your fee for a plan seems higher than that which my broker/banker/non-fee-only advisor/brother-in-law says they will charge. Why is that?
A commissioned-based salesman may charge very little (or even nothing) for a plan. The salesman must be compensated for his work, however, and the way he is paid is through commissions from the product he sells. These commissions do not come directly out of your pocket, but from higher fees that an investment manager, mutual fund, life insurance, and annuity companies charge you for these products.
Can you give me a concrete example comparing the cost of fee-only planning versus commission-based?
Sure. Suppose that you need a fairly straightforward retirement plan, plus a portfolio recommendation on a $500,000 portfolio. A ballpark cost for the plan plus the recommendations might be $3,000. In comparison, a commission-based planner might offer to complete a plan for just $300 – or it might even be free. The catch is that the investment recommendations will very likely include loaded – or commissionable – funds on which the load is 5%. Thus, the planner would earn $25,000 in commissions, and that cost would be passed on to you over time in the form of higher fees. Annuities typically pay anywhere from 5%-7% in commissions, $25,000-$35,000, that is passed on to you over time in the forms of higher fees, expenses, and surrender charges.
What is the difference between a Fee-Only advisor and Fee-Based advisor?
A Fee-Based advisor typically charges 1%-2% of assets under management. If you make money, they make money; if you lose money, they make money. Most Fee-Based planners do not manage the money themselves, but outsource it to third party managers, which also charge a management fee, which can sometimes brining an annual fee above 2.5%, on a $500,000 account, that is $12,500 per year.
The National Association of Personal Financial Advisors (NAPFA) is the nation’s leading organization of fee-only advisors and describes the relationship this way…
…A financial planner who has a financial stake in the course of action that he/she recommends to a client faces an inherent conflict of interest and connote be considered objective and unbiased. This is true even if the planner truly believes that he/she has only the best interest of the client at heart. Unfortunately, the vast majority of financial advisors in the United States are sellers of financial products. Some or all of their income may be dependent upon their ability to steer their clients to a limited number of the thousands of financial products available today. (Putting said the conflicts of interest factors, this limiting of choices in and of itself often is enough to impact the quality of the investment advice).
NAPFA believes that many of the problem that best American today in their financial affairs—including the mismanagement of debt failure to protect retirement assets and poor allocation of savings and investments—relate dirtily to the conflicts of interest that pervade the marketplace”
We are compensated by fees paid to us by our clients under an agreed upon fee arrangement, and do not sell any products of any kind. In this way, we can be completely objective in our evaluations and recommend a course of action for each client based solely on strategic financial considerations and what is in the client’s best interests.
What we recommend
We recommend a low-cost, transparent, no-frills approach to investing through the use of index funds, ETF’s and no load mutual funds, which will save you thousands of dollars in expense fees, potentially allowing you to grow your assets quicker. We like to think that this objective, no-frills, no-fuss approach is preferable over complex financial products, enabling you to focus on your goals, the process, and not the product.