The phrase "Financial Advisor" probably strikes more fear into people today than could be measured. With everything going on in the current economic and political market, the average person has good reason to be cautious, especially when their hard earned dollars are at stake.
The financial services industry has had a long love affair with commissions, as well as the investment and insurance products that are associated with them. In the past it may have seemed that a persons options were limited if they were unwilling to pay someone, somewhere, a commission. Those days are over, period. The availability of discount online brokers (eg: Scottrade) aside, the focus here is to demonstrate how in most situations the fee-only compensation method is better in the long run.
One of the hardest things to achieve with commission products is no conflict of interest. Simply put, could the advisor benefit from selling you investment A over investment B, even if B is better suited to you? Aligning the advisors motives with your goals is the key to an honest and beneficial relationship. The way this can be done is by making sure of two things, one...the advisor needs be open about any and all fee's or compensation that will be incurred and the services that will be provided in exchange. Two... this is your part and its simple, just be open about what you want out of working with the advisor and be sure to answer his/her questions honestly. Where the difficulty begins is making sure that the advisor is more concerned about your particular needs than how todays sale will affect his/her bank account!
The solution to this is to remove all that "behind the scenes" money and focus on providing a valuable service for a fair price versus just closing a sale. Through the fee-only compensation method this is usually done in one of four ways: 1.) a fee is charged based on a percentage of assets under management 2.) a flat fee is charged for a specific service 3.) the advisor charges an hourly rate for services 4.) the client pays an annual fee to retain the advisors services. Each of these methods is best suited for different people, based on the level of assets as well as what exactly they need accomplished. I will give a brief summary of each methods' benefits and drawbacks.
Charging a fee based on the assets under managed is probably the most common and could be considered an entry into the fee-only pricing model. This method ties in well with investment management because as the the clients assets hopefully increase in value, the advisor receives
greater compensation. Fee's can range from 0.5-2.50% based on a scale that gives larger dollar amounts a price break. There can be a wide range in what is provided with this fee, sometimes basic financial planning is included as a bonus along with many other possibilities.
This method is best suited for larger dollar amounts as there may be minimum required asset levels. A possible downside is that when performing comprehensive financial planning it is necessary to look at a clients whole financial picture. There is the potential for an advisor to put a greater emphasis on investing in order to increase his/her revenue, when for example, it may be best for the client to pay down high interest debt.
The second method is what I like to call "fee-for-service". As the name suggests, this fee is charged for performing a specific service such as a basic financial plan. This is a one time fee that is ideal for those individuals that would like the input and guidance of a professional, but prefer to do any ongoing monitoring themselves. It is also suited for those with smaller dollar amounts or in conjunction with investment management.
In fee-only financial planning the remaining two pricing options are less common, but certainly have their uses. Paying an hourly fee to an advisor can be useful if basic services are required that might no warrant paying for a full financial plan. On the other hand, this option may be required if a particular plan is very involved and requires work above the initial amount. The final method of paying a retainer fee is usually reserved for those who have large asset levels and request an all encompassing "financial coach". In these situations, the advisor could upon request, sit in on meetings with the clients other professionals such as accountants or attorneys to provide guidance on any relevant issues.
It is important to understand that each of the methods outlined can be right for some and wrong for others. Where the answer lies is a compromise between service, price, and comfort level.
When finding a financial advisor, the keyword is trust. You may have noticed a few references to relationships throughout the article, well this wasn't an accident. Working with a financial professional is exactly that... a relationship. It may not be a romantic one, but it doesn't have to be a dysfunctional one either!
