Are You Paying Too Much for Financial Planning and Advice? by Jane Bryant Quinn

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Are You Paying Too Much for Financial Planning and Advice?
By Jane Bryant Quinn | Sep 21, 2010 | 5 Comments

How much are you paying for the financial-planning advice you get? Some investors don’t know. Others think they know but don’t. “Fee-only” planners and registered investment advisors state their fees up front. “Fee-based” advisors appear to do the same but might be charging you in other ways. Brokerage house advisory accounts charge the most and can entangle you in costs you didn’t expect.

In short, a stated fee isn’t always what it seems. For that matter, neither is an advisor. I recommend fee-only planners but I’ve found some who are so new to the business or so limited in their skills that I wouldn’t go near them.

So how do you go about assessing what you’re paying for advice and what the potential conflicts or trouble spots might be? Here’s a rundown:

Fee-only advice. This is my choice, always. These advisors give you a price list up front, for work by the hour, by the task, or for ongoing management of your money. They don’t take sales commissions, so they’re not primed to push products. They sell only their planning and investment expertise.

Within this world, however, there’s a lot of variation.

A fee-only planner, with a CFP designation (for Certified Financial Planner) helps you establish your priorities and goals, create budgets, set savings targets, test your insurance safety net, establish retirement savings accounts, project future retirement income, plan for taxes, and make basic investment decisions. By “basic,” I mean simple asset allocation and picking no-load (no sales charge) mutual funds. That’s all that most families need. You can find some of these fee-only planners through the Garrett Planning Network, the Alliance of Cambridge Advisors, or the Financial Planning Association (when you search the FPA site, click on “How Planners Charge” and check the box for “fee-only”).

But some of these advisors — especially people who have been in business for only three or four years — might not have the knowledge or experience to analyze your investments in depth. Those with a brokerage-house background are familiar with securities, but others are still learning. They might be qualified to advise on mutual funds but not individual stocks and bonds. They might be taking clients before they’ve finished their CFP.

On average, you’ll find more experienced planners through the National Association of Personal Financial Advisors. Some NAPFA members deal only with people of higher wealth. Others take middle-class clients, too (see what their websites say).

Even planners with good paper qualifications might not serve you well if they don’t understand your life experience. For example, young planners who don’t own homes are not the best guide through mortgage decisions. Someone in his or her mid-30s will think more aggressively about investments than someone in late middle age. If you’re approaching retirement, you want a planner who can feel the same, cold wind of uncertainty that you do.

Fee-only planners typically charge 1 percent on accounts up to $1 million or so, and less on larger amounts. But fees have been going up, says Tom Orecchio of Modera Wealth Management and former president of NAPFA. Some firms charge 1.5 percent or more for the first $500,000.

“Advisors say they’re working harder, for less money, than at any time in their career,” Orecchio says. Accounts under management have declined in value, clients need more handholding, and more new products are coming to market that need evaluating. So they’re charging people more.

Normally, a percentage fee applies only to money that the planner has directly under management. A few planners assess the fee on your total net worth, including your 401(k) and home equity. “That’s for comprehensive financial planning,” says John Sestina of John E. Sestina and Co. “We advise on everything, including whether to refinance a mortgage and how to allocate a 401(k).” He charges $5,000 for accounts up to $1 million (that’s 0.05 percent, at the top) and larger fees for larger accounts. For younger clients, he offers “financial planning lite”– $1,000 for full planning and investment services on accounts of any size, but only two or three meetings a year.

Fee-based advice. Here, you have wolves in sheep’s clothing. It sounds as if they also give fee-only advice. In fact, they sell products and earn commissions. You might pay fees for some products and commissions for others. The size of the fees might depend on what else you buy. “Fee offset” means that the fee is deducted from the commission you pay. Commissions aren’t always visible, so it’s easy to pay more than you realize.

Brokerage house advisory accounts. You pay fees here, too. The broker provides an investment plan, developed and monitored by the firm’s advisory team. You get periodic reports. Small investors, with $25,000 to $50,000, might be charged in the area of 2 percent a year. These accounts don’t include packaged products such as variable annuities or unit trusts. Your broker might sell them to you on the side, earning a commission on the trade.

Skip these expensive advisory accounts if you’re a long-term investor who holds mutual funds and a few stocks. You’re much better off in a regular brokerage account that doesn’t charge fees–or, for that matter, with a fee-only planner.

Regarding conflicts of interest, I’m always careful about the commissioned-sales world because of its fondness for selling high-cost products. But the fee-only world has potential conflicts, too. Planners who charge on an hourly basis might stretch out the time it takes to complete your job. Planners who work on retainer might pay less attention to your account, because they’ve got the money anyway. Planners who charge a percentage of assets have an incentive to hold on to your money — for example, by recommending that you keep your mortgage rather than paying it off.

Always evaluate the advice, in terms of your advisor’s interest as well as your own. Advice isn’t always worth what you pay for it. You might do better by paying less.

Is Your Financial Advisor Really Working For You? NAPFA Press Release

 

 

 

 

FOR IMMEDIATE RELEASE                                                                Contact:  Benjamin Lewis

                                                                                                                                     Perception, Inc.

                                                                                                                                    (301) 963-7555

 

With a few basic questions, consumers can find out if

their best interests are being protected by their advisor.  

 

ARLINGTON HEIGHTS, IL (April 22, 2009) – As the events of the last several months have made clear, it’s never been more important for consumers to act in their own best interests when working with a financial advisor. Consumers must ask the right questions when selecting an advisor, AND they must keep asking questions on a regular basis.

 

The National Association of Personal Financial Advisors (NAPFA) has been a vocal advocate for the consumer for more than 25 years and is currently working with other industry organizations, congressional leaders and regulators to encourage increased protection for consumers   However, even if new reforms are put in place, NAPFA encourages consumers to protect themselves by being proactive when establishing or engaging in an ongoing relationship with a financial advisor.

 

Regardless of which advisor is chosen, a consumer needs to ask the following questions:

 

  • Do you work with an independent custodian? Whether your advisor is managing your money or you are the person who signs off on each financial decision, your advisor should not be holding your money. Your money should be held by an independent custodian company. Make sure you know the name of the company; how to contact the company; and your account numbers.  Be sure to open and review your monthly statements and check on the accuracy of any trades and withdrawals in your accounts.

 

  • Will I be able to review all transactions that are made? When you receive your statements, be sure you carefully look at all transactions. Make sure you understand each purchase, sale, deposit and withdrawal and why it was made. If you have a question concerning a transaction, call your advisor immediately. If you aren’t satisfied with the answer you receive, call the custodian directly.

 

  • Will I be able to make checks payable to the custodian?  When making a deposit to your investment account, write the check to the custodian, not to your advisor.  Be careful of advisors who ask that checks to be made out to them.

 

  • Do you require a General Power of Attorney?  The General Power of Attorney document will allow your advisor to remove money from your accounts without your special consent.  Typically a Limited Power of Attorney, which allows the advisor to make trades on your behalf, is preferred.  You may want to discuss your personal situation with an attorney. 

 

  • Can I have copies of statements sent to a family member?  If you don’t understand your statements, tell your advisor to send copies to a family member or another professional who can help you.

 

  • Stay in contact with your advisor. Visit with your advisor at least annually, and stay in contact by e-mail or telephone. If your advisor is vague or evasive, ask for more information. Holding these regular meetings has the added benefit of making sure that you and your advisor are clear about your financial goals, risk tolerance, and investment strategy. In fact, poor communication between client and advisor is a more common source of dissatisfaction than any type of illegal activity.

 

“It is not good enough today to simply judge a financial advisor based on what you read on his or her website or in a brochure. You need to speak with them,” said Diahann W. Lassus, CFP®, CPA/PFS, national chair of NAPFA.  “Advisors who are going to act in your best interests will be forthright and honest about how they operate and will truly act in a fiduciary capacity at all times.”

 

Consumers who are still unsure after talking with an advisor should review the advisor’s Form ADV, which is always available upon request. Additional information about a firm may be found on the Securities and Exchange Commission’s Central Registration Depository website at http://www.sec.gov/answers/crd.htm. 

 

To obtain a longer list of questions to ask an advisor, use the Financial Advisor Diagnostic, developed by NAPFA. The Diagnostic is available for free at http://www.napfa.org/tips_tools/index.asp.

 

“Consumers who take the time to ask the right questions and do the necessary research will ultimately become smarter consumers of financial services,” said Ms. Lassus.

 

If you are interested in discussing consumer protection, please contact Benjamin Lewis at (301) 963-7555 or Benjamin.lewis@perceptiononline.com.

 

 

About NAPFA

 

Since 1983, The National Association of Personal Financial Advisors (NAPFA) has provided Fee-Only financial planners across the country with some of the strictest guidelines possible for professional competency, comprehensive financial planning, and Fee-Only compensation.  With more than 2,200 members across the country, NAPFA has become the leading professional association in the United States dedicated to the advancement of Fee-Only financial planning.

 

For more information on NAPFA, please visit www.napfa.org.