How to pick a financial advisor

How do you pick a financial advisor? How do you know if you need a financial advisor?

It’s kind of a long process, but the first thing I do is eliminate the ones who spam up an entire site.

The first step in selecting a financial advisor is to know when you need one. If you are a do-it-yourselfer and have the time and wherewithal to research the best investment options, fine. But if you find yourself in a situation where you are not sure what the best investment strategy is, such as inheriting a large sum of money or rolling over a 401(k), then it might be time to call in an expert. Remember, the cost of consulting with a financial planner is less than making a mistake with your life savings.

I would ask others who they are using a FP/FA, and their experiences with that person.

At the NAPFA website (www.napfa.org) you can find a couple of useful tools to help you as you begin talking to potential advisors. Go to the "Consumer Services" tab on the left, and you can see the tools available to help you through the process. One thing that you may find very helpful is the "Financial Planning Diagnostic", which is a list of questions for you to ask advisors. There's an analysis of the questions, explaining in detail what the answers mean, so that you can be educated when you're talking to advisors.

Hope this helps -

epinions.com has a section on financial advisors. They cover firms only, of course, not individuals- but they can give you an idea for the culture of a particular firm.

Thx very much for the responses.

Here is a link to one of the checklists BPF mentions above FYI.

http://www.napfa.org/UserFiles/File/Membership/Comp_Financial_Plan_Diagnostic.pdf

epinions.com has a section on financial advisors. They cover firms only, of course, not individuals- but they can give you an idea for the culture of a particular firm.I bounced around this site and didn't find much - might you have a specific link?

My advice is to ask around and migrate to FEE ONLY financial advisors. These are people who dont get a commission, just giving you pure advice, period. they usually charge per hour, and usually recommend low cost, low turnover funds. It is well worth paying this.
Remember, there is no free lunch. Financial advisors that say they give these services for "free" really dont' want you to know that they are paid by commissions from super expensive funds, which they will invariably steer you towards, or commissions from High cost, whole life insurance policies, which are not appropriate for the vast majority of people. They will NEVER recommend Vanguard funds, or other cheap funds, because they wouldn't be able to keep up with their Mercedes payments, or buy that home in Nantucket. So caveat emptor.

oh jeeze, here we go again. thanks interdon for your contribution which clearly has not only its own personal flavor of bias but double the called for ingredient of ignorance.

good ending though ... so i choose not to buy what you are selling.

1MO

1MO, do you not agree with interdon's first sentence?

The problem that I have is the "ask around" part. I've tried that, and come to the conclusion that none of my family or friends do any financial planning. It seems the common advice is to get referred by someone you trust. What if nobody you trust has any recommendations? Is it just a matter of going to the yellow pages?

no, i certainly do NOT agree with that. not cause it kinda recommends fee only but that it does to the exclusion of all other types of arrangements. which (if you noticed my snide comments about ignorance in the first place) is my beef with interdon's post in toto.

NOTHING in this whole wide world is RIGHT for EVERYONE. to imply or to state to the contrary takes you off my Christmas list forever cause i cannot abide stupid people.

i love fee only! i love fee based (how i ran my practice). i love commission only. i can even like salaried advisory relationships. but not a single one is best in all circumstances. and get this ... (imnho) ... each is best in its best situation.

dom, it is harder for someone who can't get a referral from someone they trust. harder, but by no means hopeless.

i have oft recommended three different mega corps because i trust that they supervise their people exceptionally well. they have brand newbie advisors and advisors who had noah and his family as clients. they are independent! they have fiduciary duties to clients! they have both exceptional training and either a very good or an amazingly excellent support staff.

1. Raymond James
2. Northwest Mutual
3. New York Life

i offer these three cause no matter where you are, they are likely to be there.

however, there are also your local guys and gals. they are harder to find but can be exceptional catches IF they are good. in this case, sure ... start with the yellow pages and interview at least a few.

whether you pick a Fortune 100 (mutual - ie independent) company or a local mom n pop; your GUT should be telling you early on if this is someone with whom you can form a very long relationship.

1MO

1MO,
I see your point about the blanket statements. I try to read everything here with a grain of salt.
Thanks for the recommendations of companies to look at. I have that saved for some future date when I actually go about looking for an advisor. I'm just a few months from moving cross country (excuses, excuses).

Dom, regarding 1MO's comment about finding the "local guys and gals", presumably meaning independents that are not necessarily affiliated with the mega-corps, I'll again direct you toward the NAPFA website (www.napfa.org) and the Garrett Planning Network website (www.garrettplanningnetwork.com). These folks are all fee-only, and adhere to the fiduciary standards as outlined at www.focusonfiduciary.com, a NAPFA-sponsored initiative.

oh jeeze, here we go again. thanks interdon for your contribution which clearly has not only its own personal flavor of bias ....yeah, as opposed to your unbiased posts :rolleyes: Hello, pot.

FYI a great many posts here are biased. That's to a large extent what online forums are about, in fact. It sure doesn't make them bad or wrong per se.


but double the called for ingredient of ignorance.
That is also merely your opinion and an unfounded one to boot. His advice - generally speaking - is sound, and to imply it isn't simply because you don't like it (esp given you read assumptions into it which may or may not even exist) is asinine.

biggie reddie - while i will agree with you about general bias, this is my profession. when i am made aware of a bias ... i admit it. further, i dont fling my bias around in total disregard to whom i may cut across the throat as a result. i know you are a relatively new "joiner" to the group ... but most on here realize that i am the first to admit i have a HIGH DEGREE of arrogance about my work. as a result, when someone insists on posting STUPIDITY based on IGNORANCE i fell it is my duty; no my CALLING FROM GOD to point it out. (By the way, this should put to end any debate by readers as to whether i may THINK i am God).

(note: i also post here cause it is FUN! and a lot of my demeanor herein is INTENDED to be fun. i cant tell you the number of people who have IMd me or outright stated in the forum itself how much they "enjoyed" the way i put something. so, if i am making you mad because of the WAY i said something - tough.)

ok, lets address, as you call it ... "my unfounded opinion(s) from my response to interdon:

My advice is to ask around and migrate to FEE ONLY financial advisors. These are people who dont get a commission, just giving you pure advice, period. they usually charge per hour, and usually recommend low cost, low turnover funds. It is well worth paying this. Remember, there is no free lunch.

i addressed this in my original response at the behest of Dom. in addition, where is interdon's great epiphany? does his comment there is NO "bias" on the part of fee only advisors? sounds like it to me since he criticizes the non-fee only advisor up one side and down the other but lists ABSOLUTELY no drawbacks to fee-only advisors. one of the smartest guys on this forum is jim blankenship and HE is a fee only advisor and HE will tell you there CAN be conflicts of interest in this fee arrangement. my point (which is irrefutable) is that the fee arrangement doesnt make someone more or less moral than another.

Financial advisors that say they give these services for "free" really dont' want you to know that they are paid by commissions from super expensive funds, which they will invariably steer you towards, or commissions from High cost, whole life insurance policies, which are not appropriate for the vast majority of people.

i am sure a semi-colon in there somewhere would have helped! anyway, there are soooo many issues in this rant it will be hard to cherry pick something out. how about this: (1) advisors who earn commissions don't want you to know: wrong, most places with whom i have experience REQUIRE telling clients that. (2) commissions are earned from "super expensive" mutual funds and whole life insurance: hey brainiac ... go to the NASD expense calculator and see what share class they recommend. in most cases it will be the same SUPER EXPENSIVE 5% up front load (when you have a choice). so; gnash your teeth at them, not to us. (3) whole life - (i hate addressing this yet again) ... if you hate whole life, you are PROBABLY a dufus. the MAJOR insurance companies make MOST of their money off of TERM life. most insurance "commissions" are within 5-10% of each other (term or universal or whole). so, a "salesman" selling his soul for 5% is kinda stupid to me. (note: there are bad people in EVERY line of business, i am not talking about any one person ... just helping you understand what you dont).

They will NEVER recommend Vanguard funds, or other cheap funds, because they wouldn't be able to keep up with their Mercedes payments, or buy that home in Nantucket.

this is how you spell ignorance! this assumes a lot that is not in evidence. in response to this allegation i offer myself (i know you think we are all liars, but what the heck): i drive a toyota avalon that is 7 years old. my wife drives a 3 year old toyota sequoia (she is a soccer mom ... and my best friend). we have ONE home and have no vacation spot in the hamptons or otherwise. so, you tell me my friend, is it ignorant to lump a whole segment of people together in any way? me thinks it is. is it doubly ignorant to do so and then to be wrong? me thinks it is. so how do you spell asinine? perhaps m-i-r-r-o-r?

1MO

This is semi-off topic, but I have to squeeze something in...

One of topics I laugh most at when I hear it is when people comment on how a stockbroker that works on commission will never recommend Vanguard funds, so that must mean they're crooks. Do these people not stop to realize the reason this is the case, is because Vanguard funds are no-load funds? Brokers have a right to get paid, and simply wouldn't make any money if they did. If Vanguard were to roll out A shares, I'd guarantee brokers would sell them. There's nothing wrong with making a living on commission. Would it be ok to ask a Honda salesperson if they could sell you a Toyota? Probably not.

1MO

If you would stop buying all that insurance you keep talking about you could afford a better car…hehe.

SADALE

I believe you just made a pretty strong argument against your own case, or at least against stockbrokers. Yes they have every right to get paid, but their recommendations should not be based on their commission. It should be based on what’s best for the client regardless of commission or fee or whatever. The way I interrupt what you just said was Vanguard may be the best option but it won’t be considered due to the brokers’ issues not the clients. I’m sure that is not what you meant but that’s how it reads to me.

Please don't try to read something into my comments that just isn't there. If you truly feel that my point was brokers should recommend based on commission, then that is a pre-existing bias you have, because nowhere is that mentioned or implied in my comments.

All I'm saying is, if Vanguard had share classes for commission based brokers, it'd be yet another family of funds for them to choose from when they are putting together a portfolio recommendation for a client. If Vanguard's funds end up being the best choice for a particular client, I'm sure they'd get used.

If I called up Vanguard, and told them what I wanted, would they tell me to go use an American Fund if the Vanguard fund wasn't the best? Probably not.

in partial defense to sadale - there are 12000 mutual funds. a good third of them are crap. probably a third are decent and a third are pretty awesome.

generally financial advisors are not (or should not be) a stock picker. they design portfolios. you could have several decent and several awesome funds in a portfolio. you could have a situation where there werent awesome funds to even choose from for some of the categories you need to fill. this is a tall order for a professional to adequately research and then to educate a particular client on.

now, does it matter if the broker is paid $500 for this by commission or by fee? i think it makes absolutely no difference.

several posters always whine about "churning" situations. folks, this is ILLEGAL. it DOES NOT happen and if it does, its a crime! go start a bank robber thread and talk about illegalities there. further, there has been significant discussion on related threads about fiduciary responsibilities. again, if there is a breach of trust it carries with it the penalty of LAW.

sadale's closing point is 100% right. why not call vanguard and inquire why they dont refer American Funds when that is a better choice. OH! is it because they make money off of you? is it because they have no fiduciary responsibility to you? is it because you just gotta absolutely have something to gripe about?

1MO

oh oh oh! this is a great story. though it has happened several times in different variations, i love this one:

i met with prospective clients quite a while ago. i found that they had USAA Mutual Funds (mirrored funds) for their roths. as you may or may not know, USAA offers "no load funds". well, i thought to myself. great, at least they are doing something. but they tell me they are very much NOT happy with performance.

i review them to find that USAA over the phone put them in money market mutual funds because the clients said "we are kinda conservative". ok, that is fine but clearly these clients didnt understand "conservative" in the same way that the telephone operator at USAA did.

6 years later they run into me. if i put them into something commission based but doing better than the 2.5% they were getting ... would it have been worth 5% of what they contributed?

would it have been better to charge them for 10 hours at $200 plus per hour to give them a little education and un-screw their entire financial world? or, would a commission of $1500 been better? hmmmm.

Is bias the word of the day?

I have read it over several times. I don’t see where I am reading anything into it. Did you or did you not say that brokers don’t recommend Vanguard because they will not get a commission?

Jims money, I have a feeling you know exactly what I mean, however, are choosing to be deliberately obtuse.

Your next assertion will of course be something about conflict of interest, right? No. The point is, commission based advisors sell products that compensate by commission. Much in the same way many RIAs that drop their Series 7 and offer fee-based advice don't sell securities. In that world of funds with loads, there are thousands of funds to choose from. Of those funds, he or she has the ability to choose the best funds. If Vanguard isn't one of them, so what. In all those funds, there will be one as good if not better to use. This way, everyone's happy, and there's no real conflict of interest. Ever wonder why many RIAs and CFPs aren't telling their clients to use loaded funds? Could you imagine the griping from clients or regulators? But what if a loaded fund is the best choice? The fee only guy is still probably not going to recommend it because he doesn't want to lose a client over costs. How is that really different.

It's probably worth noting, that while I was working, I saw both sides. I began as a commission only broker, and finished my career providing primarily fee based advice. I don't think one is better than another - there is room in this world for both.

SADALE

I had to look up the definition of obtuse to see if that was my intention.

a : lacking sharpness or quickness of sensibility or intellect : INSENSITIVE, STUPID b : difficult to comprehend : not clear or precise in thought or expression

No that is not what I was trying to be. Could just be my comprehension skills but for me definition b is exactly what post #17 was.

I have been hanging out here enough to know your basic views which is why I was surprised at your wording. Read my last sentence of post #18 again. To me, one has to “read into it” to get your meaning out of it. Post #21 is very clear.

It may well be that my questioning your post didn’t help anyone but me, but it caused you to reply in post 21 where I did learn something, and that’s my main purpose for hanging here.

Why would you even choose a broker/financial advisor if they are going to limit your fund choices? I do not mean limit your choices by avoiding bad funds (this would be the good route), but by avoiding above-average funds just to "grease their pockets" by choosing funds with a commission? So you pay your advisor a fee and/or a commission, a load on a fund, and the fund's expense ratio on top of that. Wow. You need to double the S&P's performance (not a common benchmark) just to get back to your original principle. Talk about spinnign your wheels.

I do not think Toyotas and Hondas are a good comparison in this case. You are seeking advise on the best route for your monies through a second party to invest in the best of all third parties available (you hope). You should be able to get the most bang for your buck, or in this case many bucks. You are not just going to a specific broker for a specific fund family. If that was the case, I would hope you would do it yourself and save yourself some money.

I am by no means picking on particular posters here, just some of the views used in this thread.


On a side note, the original poster of this thread signed up, posted 14 times within an hour, and has never posted again, yet all of his/her threads have prompted some level of response. Not bad.

dingo, it is not a matter of not picking "the best" funds. remember, there are a gazillion ways to measure a fund. if it were just the top performer, then there would be less of a need for a professional advisor.

i just ran a quick check of the top ten funds in all the major categories - not a single one of them was vanguard (out of about 80ish funds). of these 80 funds, i have never placed ANY of them with a client. this is exactly the case of why your advisor shouldnt and isnt just picking the top choice - if he or she is, beware.

by the way, you do not have to double the index to "just get back to your original principal". remember, market volatility and compounding do this quite nicely in relatively short order.

1MO

p.s. dingo, the OP posted i think only 11 times. in addition, though each got some level of response ... is this the only criteria as to whether he is valuable to the forum. is he the MOST valuable poster in the forum this week? this year? is it the number (i got a lot of numbers) or is it the quality (blankenship ;) ) or is it the genuine desire to contribute (jm) or perhaps it is extremely detailed answers (sadale).

just like an investment, each person prefers his own flavor of poster. one size dont fit all.

1MO

Jims,
My wording may have been confusing to you, and for that, I apologize. The fact is, the scenario I am referring to is just part of the business. Reps choose what kind of advisor they want to be, commission or fee-based (or both). The simple fact is there may be a slightly different product platform depending on which choice is made. It's just the nature of the business. It's not done to grease pockets. In this day and age of online brokers and online trading, the perception of the business has been altered in that an investor now expects to have pretty much unlimited access to any security. However, going that route sacrifices individual attention from an advisor. For investors that want that individuatl attention, there may very well be some limitations. It's just the way it is.

Ultimately, the onus is on the financial product/services consumer to make a reasoned and informed decision on the issue. As long as there is transparency on compensation and a clear understanding of the limitations and potential for conflicts, it's a free market and as sadale has clearly stated, there is room for all kinds of arrangements.

Okay, here's my humble opinion on some of the issues brought forth:

Success as an individual investor has less (in fact, very little) to do with the share class of the investments (and therefore the way they pay for advice), and more (in fact, practically all) to do with discipline and planning. The reason that there are 12000 mutual funds out there, of which 1/3 are good, 1/3 are so-so, and 1/3 are ugly, is that the market is always flushing things out. It simply cannot happen that all funds are stars.

You can choose the costliest funds out there, and put them side-by-side with the no-loadliest (I think I'll trademark that term) - and if you diversify and set a plan in motion to make regular contributions over time in the costly loaded account, while by happenstance making a poorly timed, undiversified, one-time lump-sum contribution in the no-load account, I'll wager that you'd come out ahead in the load account - by leaps and bounds.

Granted, I don't subscribe to usage of loaded funds for my clients, but that's my philosophy. That doesn't make it the only correct philosophy, it just makes it MY correct philosophy. There are many roads to success. The reason that I choose to operate in this fashion is because I believe my clients are better served by this business model. I presume that the advisors working in other business models believe the same thing about their model, if they've been around for any length of time. You just can't be successful in this industry if you don't care about the outcome for the client, but rather only care about lining your own pockets (as has been alluded).

Now, one last item I wanted to point out: there have been several mentions of compensation methods in this thread, and I wanted to set the record straight, because some of the methods are being bandied about as if they were synonymous.

* Commission - where a broker or advisor is paid to sell a security. Primary allegience is to the brokerage - if a transaction doesn't occur, he doesn't get paid. Not normally a fiduciary for the client.
* Fee-based - where an advisor receives a fee in addition to a commission, and often the commission is waived or credited to the client account. Depending upon their contract, may be independent and operate as a fiduciary on the client's behalf.
* Fee-only AUM (Assets Under Management) - the advisor is compensated by a percentage of the assets managed. No commission is paid. Operates as a fiduciary for the client.
* Fee-only hourly - advisor is compensated on an hourly basis for time spent working on behalf of the client. Operates as a fiduciary on behalf of the client.
* Fee-only retainer - advisor is compensated on an annual basis for advice and management of accounts. Typically not dependent on size of the account under management. Operates as a fiduciary on behalf of the client.

So as you can see, there is a difference between fee-based and fee-only. It's up to the individual to determine if compensation method is an important enough factor in their choice of advisor - but as has been stated several times the advisor relationship and the quality of the advice should be paramount in your decision. If you happen to like one compensation method over another and this is a very important factor for you, then use that as a benchmark - but not as the only factor.

one of the smartest guys on this forum is jim blankenship

As usual, 1MO, while I may not totally agree with you on every point, I find your posts both compelling and difficult to refute... :)

Okay, here's my humble opinion on some of the issues brought forth:

Success as an individual investor has less (in fact, very little) to do with the share class of the investments (and therefore the way they pay for advice), and more (in fact, practically all) to do with discipline and planning. The reason that there are 12000 mutual funds out there, of which 1/3 are good, 1/3 are so-so, and 1/3 are ugly, is that the market is always flushing things out. It simply cannot happen that all funds are stars.

You can choose the costliest funds out there, and put them side-by-side with the no-loadliest (I think I'll trademark that term) - and if you diversify and set a plan in motion to make regular contributions over time in the costly loaded account, while by happenstance making a poorly timed, undiversified, one-time lump-sum contribution in the no-load account, I'll wager that you'd come out ahead in the load account - by leaps and bounds.

Granted, I don't subscribe to usage of loaded funds for my clients, but that's my philosophy. That doesn't make it the only correct philosophy, it just makes it MY correct philosophy. There are many roads to success. The reason that I choose to operate in this fashion is because I believe my clients are better served by this business model. I presume that the advisors working in other business models believe the same thing about their model, if they've been around for any length of time. You just can't be successful in this industry if you don't care about the outcome for the client, but rather only care about lining your own pockets (as has been alluded).

Now, one last item I wanted to point out: there have been several mentions of compensation methods in this thread, and I wanted to set the record straight, because some of the methods are being bandied about as if they were synonymous.

* Commission - where a broker or advisor is paid to sell a security. Primary allegience is to the brokerage - if a transaction doesn't occur, he doesn't get paid. Not normally a fiduciary for the client.
* Fee-based - where an advisor receives a fee in addition to a commission, and often the commission is waived or credited to the client account. Depending upon their contract, may be independent and operate as a fiduciary on the client's behalf.
* Fee-only AUM (Assets Under Management) - the advisor is compensated by a percentage of the assets managed. No commission is paid. Operates as a fiduciary for the client.
* Fee-only hourly - advisor is compensated on an hourly basis for time spent working on behalf of the client. Operates as a fiduciary on behalf of the client.
* Fee-only retainer - advisor is compensated on an annual basis for advice and management of accounts. Typically not dependent on size of the account under management. Operates as a fiduciary on behalf of the client.

So as you can see, there is a difference between fee-based and fee-only. It's up to the individual to determine if compensation method is an important enough factor in their choice of advisor - but as has been stated several times the advisor relationship and the quality of the advice should be paramount in your decision. If you happen to like one compensation method over another and this is a very important factor for you, then use that as a benchmark - but not as the only factor.
Excellent post, thx

I think that was a great post.
Since Mr. Blankenship, given his business model, finds his clients are well served by utilization of no-load mutual funds vs. load funds, I can't imagine he's too worried about missing out on a great load fund since he knows in the world of no-loads, he will be perfectly capable of helping his clients reach their goals. Nobody should criticize him for it. It's no different for the broker who works on commissions paid by the mutual fund companies. If he can meet his clients' needs by using load funds, not using a Vanguard is not going to make that big of a difference, and he certainly shouldn't be criticized for not being able to use them.

jim, at the risk of sounding like an idiot - help me understand how a fee-based advisor could not have a fiduciary requirement. in order to charge a fee, specific licensing must be in place, and operating within the parameters to charge a fee places the advisor in the role of a fiduciary?!?!

* Fee-based - where an advisor receives a fee in addition to a commission, and often the commission is waived or credited to the client account. Depending upon their contract, "may" ... "operate as a fiduciary on the client's behalf."

(my emphasis and editing)

1MO

I will defer to your experience - I perhaps made an assumption about licensing that was incorrect. If, in order to charge a fee for service one is automatically under the jurisdiction of the '40 Act, then I stand corrected. But aren't there some grey areas, where the fee-based advisor can wear either hat - and this may drive the type of discussions that can take place, therefore determining fiduciary responsibility?

Please help fill in the gaps on a fee-based advisor situation.

Well, I've done some googling on the topic, and it's no wonder there is confusion between fee-based and fee-only compensation systems.

For example, I found this page http://www.norrisfinancialgroup.com/2016290490.html where the writer seems to use fee-based and fee-only interchangeably, while on this page (on the same site!) http://www.norrisfinancialgroup.com/2016290491.html I found the following quote:
Fee-only vs. Fee-based
Do not be confused or misled! - Fee-only is definitely not the same as fee-based. Fee-based is a confusing term for a compensation structure that used to be called, "fee plus commission."

Fee-based usually means that a client pays for a plan or other advice and then pays to buy investments with commissions or markups that go to the advisor. This can be worse than the straight commission arrangement because you may pay twice without realizing it.

Fee-only is what leading financial writers often recommend. It can be safer, more objective, and without the drag of commissions it has every reason to have performance as good as or better than the fee-based or commission approaches.



There are plenty of other examples of the confusion. What I'm pretty clear on is that there is not necessarily a de facto definition of "fee-based". Fee-Only has a definition on the NAPFA website (http://www.napfa.org/membership/OurStandards.asp), as follows:
NAPFA defines a Fee-Only financial advisor as one who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. Neither Members nor Affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations. "Fee-offset" arrangements, 12b-1 fees, insurance rebates or renewals and wrap fee arrangements that are transaction based are examples of compensation arrangements that do not meet the NAPFA definition of Fee-Only practice.

I suspect that there are many applications of "fee-based" that fall on both sides of the question of fiduciary responsibility - your mileage may vary. As mentioned before, if compensation method is important to you, and if "fee only" is what you're looking for, other methods outside the lines of the NAPFA definition are NOT fee only.

frankly i would discourage relying on the norris pages. when i see a professional web page for a profession (advisory services) that has misspellings on it, i blanche at everything else.

then they stated (from your quote): It can be safer, more objective, and without the drag of commissions it has every reason to have performance as good as or better than the fee-based or commission approaches. emphasis added.

"can be safer"
"can be more objective"
"every reason to have ... as good as or better"

this is a clear example of saying absolutely nothing at all in the most amount of words possible.

----------------

i do see where (theoretically) i could charge a fee to clients for my "knowledge" for a plan or simple advice or research (acting as a fiduciary UP the IAA '40) yet in placing a product operate as a RR for a broker. while this may be feasible, i think that violating your fiduciary responsiblities for which you were paid as a RIA only to drop inappropriate product as a RR would be actionable on the part of the client.

jim, i understand (correct if wrong) that you operate both fee only and that you do NOT place product. that said, do you recommend a specific product (ABC Mutual Fund) or do you recommend only the investment strategy with supporting methodologies?

1MO

I agree, 1MO, the sources weren't stellar - I just found that quote and thought I'd share...

Regarding your quote: i do see where (theoretically) i could charge a fee to clients for my "knowledge" for a plan or simple advice or research (acting as a fiduciary UP the IAA '40) yet in placing a product operate as a RR for a broker. while this may be feasible, i think that violating your fiduciary responsiblities for which you were paid as a RIA only to drop inappropriate product as a RR would be actionable on the part of the client.
I think that this is where I got my impression with regard to fee-based advisors. These kinds of arrangements may be less common these days, I honestly don't know for sure. What I do know is that the trend is for commish guys to move toward fee-based - but I'm not really sure why, unless they're intending to glom onto the idea of advice for a fee, all the while still charging the same commission that they always did...

And lastly, you are correct, my practice is fee-only and I do not sell products. Depending upon the circumstances, I may recommend a specific product - I've made recommendations on only the strategy in the past, but frankly, few clients are in a position to identify the appropriate fund(s) for implementation. As a result, I often wind up indicating a couple of no-load fund options and an ETF choice that could be used for a particular allocation.

Of course, for a limited-universe account, like a 401(k) or 403(b), I'll make the specific fund recommendations. Plus, in accounts that I am actively managing (via retainer), I will make the specific fund recommendations.

Not to sidetrack and I realize the short answer is that this can obviously vary, esp depending on services...so let's say for a "comprehensive" but 1-time service (ie setting up a financial plan/strategy and that's it, not being a broker or ongoing service, etc), what would you consider a reasonable ballpark fee? How about if by the hour? I'm just trying to get a feel of what's (very generally) the going rate(s) -

Each individual's situation is different - you knew I'd say that, didn't you? I want to provide you with some quidance on your question, but I can't speak for the industry - I can only give you some broad guidelines.

I'd say you should plan on somewhere between 10 and 15 hours for a financial plan like you've described. The hourly rate is highly dependent upon the cost of doing business in the locale, the financial planner's experience level, whether or not the planner is actively accepting new clients, and the like. I've seen hourly rates ranging between $120 to $360, but it's also been quite a while since I've seen any new information on hourly rates, so this is probably out-dated. For a rule of thumb, assume that an experienced, qualified CFP® financial advisor is worth somewhere within the range of the hourly rate of a CPA and an attorney of similar experience level in your area. Interesting to put it that way, as well, because the CFP® practicioner is traditionally considered to be professionally in that same area, between a CPA and an attorney.

Jim,
I don't doubt you for a second, but I have a hard time imagining why it would take 10 or 15 hours for a financial plan. I know you're trying to answer an impossible question, but I'd like to throw out an even more impossible question. Can you give an estimate or example breakdown of the time spent?

not to answer for jim (and i also look forward to seeing if he will break it out). that said, in my experience it takes 10-12 hours (right in his estimated ballpark). and for that i would charge about $225 to $250 per hour.

dom, that is the point about what is involved. everyone assumes that planning is a snap and it is anything but. in addition, there is a lot of time that is put into distribution planning.

1MO

I'm thinking doing my own thing may be worth the effort after all. Yeah I know I can theoretically more than recoup that money with the advice/plan given, etc etc, but....well that's a theory, just not convinced I'd get my $ out of it.

What about buying/using Moneytree and the like? That goes for about $400-500 I think, but still a good bit less, plus then I'd have it for ongoing use. Again, yes I know it's not the same thing as having a pro prepare a plan, but when you're talking several grand just for a finance/retirement plan (ie one-time charge, not including ongoing service).....

A breakdown of time spent... on whose situation? Thankfully, dom, you've admitted up front that this is an impossible question to answer. What I'll do, as a starting point, is list out the areas that are typically covered in what I'd call a comprehensive plan:

- goal-setting - spending time understanding the wishes and desires of the client, and quantifying them in terms of time horizon and costs for use in planning; this can include retirement, college, home purchase or remodel, opening a business, parents moving in, and just about any major financial event
- priority-setting - understanding the relative importance of each goal
- risk analysis - explaining to the client the concepts of risk, how risk is required for return, and garnering an understanding of the tolerance level for risk given the timelines and current financial condition
- cash flow - review of financial flows, finding those "unknown" expenditures that can be harnessed toward financial goals; understanding near-term and long-term requirements for cash flow; review of prior tax returns for any isssues there as well
- present financial condition - review of present accounts, allocation, future inflows into those accounts; present position with regard to debt, as well as future debt planned and debt to be retired
- projection of future cash flows - modeling the future as it pertains to the goals stated, with regard to the present financial condition and assumptions made about holdings, inflows, taxes, debt, and timelines
- risk management - review of current insurance coverage(s), especially with regard to life, disability, and long-term care insurance needs, both now and in the future, given results from the future cash flow projections; this often also entails a review of employer-provided benefits and recommendations for participation therein
- estate planning - review of present accounts, ensuring appropriate titling and beneficiary designation both now and in the future, given results from other components of the planning process
- strategy development - this can entail anything from tax planning to portfolio development to insurance recommendations, debt reduction, distribution planning, and opening and funding the appropriate accounts.
- communication of the results/recommendations - sometimes this takes a couple of hours or more on its own. The point is that the client comes away with a thorough understanding of the recommendations and the reasoning behind them.
- implementation - not always required, but often is requested. I spend time helping the client open accounts and making allocations if required, implementing insurance coverages (reviewing policies and the like), implementing tax strategies, etc. - or sometimes the client turns the implementation completely over to me.
- follow up - regardless of the one-time nature of your example, plans are reviewed after approximately one year to ensure that circumstances have not changed dramatically (with regard to the information that I have on hand). If the client doesn't wish to engage in formal follow up review, then the engagement is complete.

Now, given the fact that a typical comprehensive financial plan entails at least three meetings with the client, each lasting on average one and a half hours, that leaves five and a half hours (on the low end) or ten and a half hours (on the high end of my estimate) to cover the remainder of the activities I've listed. In the case of the lower end of the spectrum, some of the components are either eliminated or reduced in scope. For example, if the client only has a 401(k), no debt other than his mortgage, is single and has no children - then obviously the planning cycle is reduced, due to the reduction in planning factors.

Now, the other thing is that many financial planners (myself included) notoriously underrecover - that is, we often spend more time on the plan than what we bill, due to additional research required, or additional time required for communication of the recommendations, or any of a myriad of activities.

Hope this gives you an idea of what is involved in a typical financial planning engagement.

What, you mean financial planning isn't just counting the number of stars on a Vanguard mutual fund?

Seriously though, I think that was a great post from Mr. Blankenship. It should be very clear to the lay reader or investor why brokers, advisors, and CFPs get paid what they do.

Thank you very much for the reply, Jim. That's exactly what I was looking for. You answered the unanswerable question.

but for $500 you can buy a software package that you can put some numbers into!

1MO

separate topic: thanks jim. i will spend 10 paragraphs to tell someone why they are wrong and be rude and snide in the process. but i cant bring myself to 10 paragraphs (as you did) for pure edification of a point. thanks for the time and sharing with all.

1MO

All the world's a stage,
And all the men and women merely players:
They have their exits and their entrances;
And one man in his time plays many parts...
- Bill Shakespeare

We all have roles to play, 1MO, each useful and necessary. ;)

* Commission - where a broker or advisor is paid to sell a security. Primary allegience is to the brokerage - if a transaction doesn't occur, he doesn't get paid. Not normally a fiduciary for the client.
* Fee-based - where an advisor receives a fee in addition to a commission, and often the commission is waived or credited to the client account. Depending upon their contract, may be independent and operate as a fiduciary on the client's behalf.
* Fee-only AUM (Assets Under Management) - the advisor is compensated by a percentage of the assets managed. No commission is paid. Operates as a fiduciary for the client.
* Fee-only hourly - advisor is compensated on an hourly basis for time spent working on behalf of the client. Operates as a fiduciary on behalf of the client.
* Fee-only retainer - advisor is compensated on an annual basis for advice and management of accounts. Typically not dependent on size of the account under management. Operates as a fiduciary on behalf of the client.


For some reason, I feel compelled to expand upon my previous description, specifically with regard to the "fee-only hourly" advisor, because it has come to my attention recently that this arrangement is misunderstood.

"Fee-Only", whether hourly, retainer, or AUM, CAN NOT include additional arrangements with commission-based advisors, such as a split commission arrangement. Fee-Only means that the advisor is ONLY compensated by the client's fee. Period. No other compensation, whether in cash or non-cash arrangements, can be accepted by the Fee-Only advisor. All of this is disclosed on the advisor's form ADV Part II.

I think this should clear up the confusion.

This Roman Meal Bakery thought you'd like to know... :)