[Editor's Note: Today's guest post was submitted by James Sweeney CFA, CFP®, MBA. James is the Founder and Wealth Advisor of SwitchPoint Financial Planning, a flat-fee financial planning firm, and one of our WCI Recommended Advisors. This is not a sponsored post.]
A few months ago, the CFP® Board decided to remove compensation method from its “Find Your CFP® Professional” search tool on letsmakeaplan.org. The move was supposedly an effort to emphasize the fiduciary duty of CFP® professionals, rather than their method of compensation.
They also said that consumers rarely use compensation method as a primary search tool.
I believe the CFP® Board got this one wrong. And apparently, most consumers are getting it wrong as well.
In this article, I will argue that compensation structure is a primary driver of services provided and advice given, and that it should be a primary selection criterion for consumers in search of a financial advisor.
Incentives Beat Adjectives: Why “Fiduciary”, “Fee-Only”, and, “Independent” Matter Less Than You Think
Everyone Wants to Say They Are A Fiduciary
A few years ago, a physician called my office to ask for a second opinion. He had been in discussions with a financial advisor at a prominent insurance company who was proposing whole life insurance for a significant portion of this investor’s portfolio.
We discussed the pros and cons of whole life insurance and in the end, I recommended against it. This difference in opinion was confusing to my new client. Why would two expert “advisors” recommend such different strategies?
I explained to him that, as a fiduciary, I had a legal obligation to act in his best interest, while the other advisor was financially motivated to sell him life insurance.
He quickly replied, “Oh, well my other advisor is a fiduciary as well.”
For a moment I was floored. How could this be? Every client of this particular firm that I had ever met had been sold whole life insurance – and a lot of it. How could this advisor recommend the same high-commission product to every single client, and yet be a fiduciary?
But it was true – sort of. This advisor was a Certified Financial Planner®. And since 2007, CFP® practitioners have committed to a fiduciary standard for financial planning (recently updated to apply to all aspects of financial advice). I am sure this advisor considered himself a fiduciary.
Did he care to explain to his clients the fine details of when he is obligated to act as a fiduciary, and when he is not? No. Perhaps it was disclosed in some fine print somewhere. But it is easier to just say “Yes, I’m a fiduciary.”
A few years ago, when the Department of Labor first proposed the “Fiduciary Rule”, the term fiduciary exploded in popularity and has turned into more of a marketing tactic than a standard of care.
[In case it isn't clear, a fee-based advisor like many insurance agents and mutual fund salesmen can wear two hats. When wearing one, he has a fiduciary duty. When wearing the other, he does not. Good luck figuring out when he takes one off and puts the other on.-ed]
More Adjectives That Sell
“Fiduciary” certainly isn’t the only buzzword advisors like to throw around. I’ve seen many advisor websites that discuss, at length, what “fee-only” means and why you should hire a fee-only advisor. This type of content helps their websites rank well on Google for a commonly searched keyword. And yet, on closer inspection, you find that they also sell insurance or other commissioned products. These “hybrid” advisors seem to have convinced themselves that they are “fee-only” because they charge fees on the investments they manage. They consider the commission work as almost a totally separate business.
Maybe they need a lesson on what the word “only” means. Or maybe the marketing benefit of being lumped into the fee-only crowd is just too tempting to leave alone.
Likewise, I’ve seen many advisors describe themselves as “independent” and tout the merits of working with an independent advisor. But what does “independent” mean? Does it simply mean you don’t work for one of the big brokerage firms? Many independent firms are still members of regional broker-dealers and have conflicts of interest that come with that relationship. Even some fee-only advisors are not truly independent because of referral relationships and the like. At the end of the day, being independent means different things to different people. But it sounds good, so it is flaunted on websites to try to establish credibility.
So, what are investors to do?
Simple.
Ignore the adjectives.
Incentives Matter More Than Adjectives
As consumers, we prefer simple clues to indicate a product or service is trustworthy. It’s what makes brands so valuable. It’s what makes the term “doctor” so valuable. These indicators of quality or expertise are valuable to both those who own them and to the consumers that do business with them.
In financial services, consumers are desperate for a similarly simple and clear way to identify the “good” advisors.
And advisors know this and are happy to use it for their own benefit.
Unfortunately for consumers, many of the titles and adjectives in the financial world are unregulated. And if they are regulated, it's often very loosely.
Anyone can say they “put your interests first”. Anyone can say they are “holistic” or “fee-only” or act as a “fiduciary”. Anyone can say they will just “do the right thing.”
In short, anyone can talk the talk. The sad reality is that our industry has more expert salesman in it than expert advisors.
James Sweeney, Founder of SwitchPoint Financial Planning
But what really matters are the incentives.
What matters is walking the walk.
There is a reason my client’s former advisor recommended life insurance to all of his clients. It’s how he earns a living. And it’s how the company he works for generates a profit.
A common analogy used is the case of a dietician and a butcher. Who should you go to for holistic advice on your diet? It seems painfully obvious, right? Your butcher doesn’t know what you should be eating, he just wants to sell you some steak. He’s not a bad person. He’s not dishonest. He’s just a butcher. He makes his living selling meat. That’s what he knows.
Likewise, commission-based advisors may be good, honest people. They may even consider that they are acting in your best interest. But at the end of the day, they are in the business of selling whatever makes their company the most money.
Whether they are being deliberately dishonest, or they are simply doing the job they have been trained to do, is irrelevant.
Most Fee-Only Advisors Still Face Significant Conflicts
Another common fee model for financial advice is charging a percentage of assets (often referred to as an AUM or assets under management fee) – typically around 1% per year. Some advisors who manage investments focus only on the investments they manage, while others also offer comprehensive financial advice. While the fee-only AUM model is a vast improvement over commissions when it comes to giving less-conflicted advice, it still falls far short as a model for delivering holistic financial planning.
Why? Consider that nearly all decisions related to your financial plan impact the size of the portfolio your advisor manages, and therefore are in direct conflict with your advisor’s revenue stream. For example:
- How much to spend in retirement
- When to retire
- Whether you should pay off debt using your investment portfolio
- Whether you should take a lump sum or monthly pension
The list goes on and on.
Not only does an AUM fee influence planning advice, but it can also influence an advisor’s investment strategy.
I once had a conversation with a financial advisor who believed he had the ability to pick mutual funds that would outperform the market. I told him the research indicated that this was highly unlikely. So we decided to put it to the test. We reviewed his top ten clients’ performance over the previous ten years and compared it to equivalent index fund portfolios. In every case, the index portfolios had higher returns than his clients.
When I asked him if he was ready to switch to a passive investment strategy he said, “James, I can’t do that. Some of my clients pay me over $30,000 a year to manage their portfolios. I can’t just put them in a buy-and-hold portfolio of a handful of index funds.”
I believe a strong force holding back a lot of good advisors from embracing a truly buy-and-hold investment approach is the feeling that they have to actively manage portfolios in order to justify their AUM fees.
If you seek holistic, unbiased financial advice, it makes no sense to hire a financial professional whose business model drives them to a specific set of knowledge and to make particular recommendations.
Myth #1 AUM Fees Align Interests
One argument I’ve heard many, many times is that AUM fees incentivize advisors to grow client accounts, and therefore align the advisor’s incentives with their clients’.
Do they?
What if your advisor has an established practice and is nearing retirement? Let’s say she manages $100 million in assets and charges an average of 1%, putting her annual revenue at $1 million. Is this advisor more worried about growth or capital preservation? If your investment plan calls for a high risk/high return approach, this advisor has a conflict with you because she prefers to keep her revenue steady and not take a lot of risk.
The flip side could also be true. Maybe your plan calls for low risk, but your advisor is looking to grow his practice. Now his incentive is to take more risk than is appropriate for your situation.
Unless you believe your advisor has a secret formula for getting higher returns without more risk (if you do, I’d invite you to read one of the many articles on this site that argue the contrary), then having your advisor’s revenue tied to your portfolio strategy is not beneficial to you and is likely a detriment.
Once again, what you want is not an advisor whose compensation varies depending on her advice. You want an impartial opinion that only considers your situation and needs.
Myth #2 – Conflicts Are Okay If “Managed”
Another common argument made by those who are clinging to the highly lucrative status quo is that all fee models face conflicts. Rather than eliminate conflicts, it is sufficient to simply “manage” them.
The concept of “manageable” versus “unmanageable” conflicts was recently discussed on a podcast hosted by two prominent industry leaders, Michael Kitces and Carl Richards.
According to Michael, very high commissions are unmanageable. He cites a 20% upfront commission product with a 20-year surrender. On the other hand, a 3% commission seems manageable.
Michael also believes it is a manageable conflict to ask your AUM-based advisor if you should withdraw from your investment account to pay off your mortgage – potentially costing your advisor tens, if not hundreds, of thousands of dollars in fees over the life of the mortgage.
I disagree.
To me, a conflict is a conflict. Trying to label conflicts as manageable or unmanageable is too subjective. What may be manageable to one advisor who has an established practice and personal savings, may be irresistible to an advisor who is struggling.
The goal should be to eliminate every conflict possible.
Myth #3 – All Fee Models Have Conflicts, So It Doesn’t Matter Which One You Choose
“But wait,” the naysayers shout, “all fee models have conflicts!”
It is 100% true that when a fee is exchanged for a service a conflict always exists: the customer wants to receive more service and pay less, while the service provider wants to do less and get paid more.
This is true in every fee model, for every service, in every industry that exists.
Everyone wants to get paid more for doing less.
How this plays out in the advisory world is that hourly advisors may want to drag out your project as long as possible – similar to what we sometimes see with attorneys. Meanwhile flat fee, AUM-based, and commissioned advisors may prefer to spend as little time as possible with each client since their fee doesn’t vary based on time spent.
So, it is true that we cannot remove ALL conflicts of interest. This conflict will always exist. But this conflict is different than most of the conflicts I have been discussing. This conflict is simply one of the consumer and service provider each trying to capture more of the value created by their relationship.
What we can and should get rid of are conflicts between advisor and client that influence the actual advice given.
And Then There Were Two: Hourly and Flat Fee Advice
While commissioned products may be suitable for certain DIY investors and a low AUM fee may work for investment-only advice, I believe there are only two compensation models that are appropriate if you are looking for unbiased, comprehensive financial advice: hourly and flat fee.
What makes flat fee and hourly unique (not perfect, but unique), is that, unlike the other structures we’ve discussed, the compensation of hourly and flat fee advisors doesn’t vary based on the advice given.
Sure, an hourly advisor may spend more time on a project than necessary. But when the hourly advisor makes her final recommendation, she has no financial incentive to recommend one solution over another.
Likewise, it doesn’t matter to a flat fee advisor if you buy term insurance or whole life, if you pay off your mortgage or add to your investment account, or if you delay social security or take it early. His compensation doesn’t change.
As the owner of a wealth management firm that charges a flat annual fee, I am certainly not impartial in my view of compensation models. At the same time, I’ve probably given this topic more thought than most.
Having worked at a hybrid firm, an AUM-based firm, and now as the owner of a flat-fee firm, I can see the difference, clear as day, from product-centric advice, to investment-centric, to holistic.
What drove the difference in focus was not experience or credentials or fiduciary status – all firms had experienced CFP® practitioners who considered themselves fiduciaries. The difference in focus then has everything to do with the business models.
What Does Matter in Your Advisor Search
The CFP Board got it wrong when they removed compensation from their advisor listings. If anything, they should have gone the other way (as White Coat Investor has with their recommended advisors) and been more specific about how their advisors are compensated. Of course, they most certainly were under immense pressure from segments of the industry who don’t want fees to be part of the discussion.
But there’s no way to escape the fact that the way someone makes their living drives the way they run their business. It’s that simple.
Talk is cheap. As you seek guidance for your financial life, ignore all the adjectives.
Instead, focus on three things:
#1 Experience and Expertise
Does the advisor have the experience and expertise to help you solve the problems you are looking to solve? This will require you to research the credentials and designations of the advisor as well as ask careful questions about existing clients and how the advisor has approached situations similar to yours.
#2 Services
Does the advisor offer the services you are looking for? For example, if you are a do-it-yourselfer looking for a second opinion, an hourly advisor may be a great fit, but not if you are looking for investment management. Meanwhile, there is a wide spectrum of services offered by different flat fee advisors – from specific services like one-time retirement plans or student loan planning, to comprehensive services that include ongoing investment management and financial planning for an annual retainer fee. Bottom line: make sure you understand what services you are getting.
#3 Compensation
How is the advisor compensated? As we’ve been discussing, this will largely drive the types of services offered and the type of advice given. Hopefully, this article has helped you understand how each fee model can influence advisors.
If you focus on these concrete criteria, instead of the marketing fluff pumped out by advisory firms, you will drastically increase your odds of finding the right advisor for you.
What do you think? What do you think is the best way to pay for financial advice? Comment below!
The CFP board dropped the ball. They were attempting to be recognized as the gold standard of “good” advice, but their own conflicts of interest led them down the path to hell.
Physicians can compare this to the ABIM and re-certification. What has the ABIM done for you lately except take your money and “invest” in condos overseas. Are they looking out for patients or physicians with their policies? Or are they looking out for the ABIM…
It is a shame we have to criticize AUM advisors, since fiduciary advisors are already less than 1% of the “financial advisors” in the county. But criticize we must (and your message is much more professional than my blog where I compare AUM to DREs).
Until people vote with their feet and money, the abuses in the financial system will continue. As Jim says, by the time you can recognize what good advice is, you often no longer need it.
Yes, thank you! Great information and logic. I wish you all strength and calm when dealing with the coming onslaught of emails and comments from those whose livelihoods you may have threatened.
I’m a successful DIY physician investor with an MBA and decades of experience. Still I have benefited from excellent financial planning advice.
We can’t know everything. And we humans all have our “blind spots.” Our emotions can harm us. For example, FPMD regrets selling all his stock after a decline in early 2020. But I pay them for their time. I negotiate a reasonable hourly rate just as I would my account or lawyer.
I get frustrated when my colleagues who quote some of these “reasons” why their salesman is giving great guidance. I tell them incentives matter. Pull the ADV2.
Lastly I love the dietician versus butcher comparison. I have used Buffett’s “barber if you need a haircut “ but this is even better. Maybe that will click with people.
Thank you for mentioning Buffet’s “barber if you need a haircut”. I had not heard that one before and looked it up.
Excellent post! I like the take-home message that conflicts of interest never truly go away- the best we can hope for is they don’t impact the advice given.
This is spot on. I love the butcher analogy-we need to remember we are vilifying people who just don’t know any better. Plenty of people in the FA space have an educational background in anything but finance. They just took a couple of exams after studying for a few weeks or months. Then they apply for jobs at firms and become salespeople. They go through training set up by that firm….and that education is very heavy on telling them strategies for how to answer questions like “how are you paid?” or “why do I need whole life insurance?” And due to their ignorance, they just take that all in hook, line, and sinker. And then they start selling. So it’s really no wonder that it’s really hard to tell these folks that they are ripping people off. From the get-go they’ve been told they are helping people. They truly believe it. Very hard to undo that
Fiduciary or non fiduciary, fee only or AUM, non of that matters, learn some basics of personal finance in a few days and DIY, it will become the best “per hour pay job” you will have in your lifetime
I agree with that. Still the best hourly rate thing I do given typical AUM fees.
Excellent post!
I have family members who are CFP or CFA titled, as well as insurance sales people. They are making good coin selling their products to others in our extended family, among others.
I am considered the poorly informed family curmudgeon for disagreeing with their hefty AUM fees or recommendations for whole life insurance instead of term. James, you have very nicely written the counterpoints to their pitches, and I will use them the next time the conversation comes up.
Thanks for being so upfront.
I agree that many brokerage firms have too often hired people to simply be investment salespeople. In fact they preferred hiring people with a background in sales. One example would be hiring a pharmaceutical sales rep with a successful sales career and built in contacts with docs to prospect. I entered the field years ago with the aim of becoming a financial professional providing expert advice & planning expertise to help investors succeed in achieving their financial goals. As I initially set out to do just that, I was shocked & disappointed to hear my hiring manager question why I was wasting my time on that “when I should be selling!”. I was absolutely flummoxed to hear that. We never discussed that expectation in the interview so I stuck to my own principles, continued developing my investment expertise (which takes years to gain PROFESSIONAL expertise) and success followed. In fact my personal wealth grew primarily from applying the same expertise to my own investments as I used to grow with my clients wealth. Unfortunately regulators have gone overboard with the “Fiduciary” label treating the problem of poor investment experience among the public as a moral issue rather than one of professional knowledge and competence. As noted in another post, salespeople are not inherently evil or dishonest. They’re mainly poorly trained and equipped to know any better when it comes to investment expertise. You can hang a fiduciary label on a salesman but it doesn’t magically improve his investment competence anymore than hanging a stethoscope on a monkey can turn him into a doctor! What does matter is integrity, experience, and professional competence. A newly minted “Fiduciary” who’s never experienced a severe market downturn is less likely to be as effective in keeping investors from giving into their fears and “selling at the bottom” versus someone with such experience over the course of 10 or 20 years. The skill to manage investor psychology and avoid poor investor behavior from sabotaging themselves (which is half the formula for success) is one that only comes from experience. Who wants to be the first to go under a new surgeon’s knife? Everyone wants someone whose done that procedure thousands of times. Now the idea that compensation is the only thing that matters & the lower the better is just stupid. Who would choose the lowest bidder to do their heart or neurosurgery? I mean really? Is it always necessary to remind people there is no free lunch and you usually get what you pay for? Instead of simply looking for a cheap “fiduciary”, look at a prospective Financial Advisor’s previous work background (was it mainly sales related?) and length of experience. Look also at their public record for disciplinary actions, complaints, settlements etc. If an advisor is a professional with a long and unblemished record, regardless of title or compensation method, you can reasonably expect them to be a good advisor to their existing clients and maybe to you as well.
I’ve seen lots of salespeople with long and “unblemished” (at least as far as the ADV2 goes) records.
One of the main problems is that the clients as a whole are poorly equipped to be able to tell the good advisors from the bad advisors, thus they cannot know if they are getting what they are paying for when they pay more. In fact, many of the best advisors I’ve ever met are also among the cheapest!
To The White Coat Investor: Maybe you know some salespeople like that but they would be excluded from my slate of criteria that includes choosing a “Professional” .. i. e. CFA, CFP, etc. people with advanced credentials so please no cherry-picking. I agree the public is about as poorly trained in identifying a well qualified, experienced, and ethical Financial Professional as they are in DIY investing and the financial media doesn’t help. They’re “sold” by the media that it’s easy to “power trade” their way to quick riches (think jobless,inexperienced, 20 y/o Robinhood trader) and they should search for advice like a Walmart shopper. They’re also “sold” the myth that you can hire great skills and talent for virtually nothing. Do we see that myth operating successfully anywhere else? In Professional sports? In medicine? Who would ever want a “high priced defense attorney” when a public defender is available? We all know why. It’s the same in the field of financial advice. I believe no one should ever charge more than they’re worth. When I was an inexperienced “rookie” I practically gave away my time and charged very little just to get started in the business. If the price is too low, there’s a reason, and probably not a very admirable one.
Well, if you exclude all the crummy advisors I agree the ones that are left are good.
Years,1000’s of surgeries, high price, absence of complaints are indicators of quality.
Many FA’s, attorneys and physicians have long careers, many clients or patients with lucrative compensation and great people/conflict resolution skills with no complaints. I am sure some have delivered quality in the bottom 10%-25% from a quality metric.
Sometimes “rookies “ are just better than the “veteran” and “cheaper”.
It’s a value question in “professional sports” and in any other profession.
That said, experience can add value primarily in avoiding mistakes.
The article was informative about the “sales techniques” and understanding the compensation motives.
Way too many conflicts of interests with advisors. Read “IF YOU CAN” by berns tein and you will become a DIY investor.
The investment part of your financial life is quite easy to learn and implement. The d istribution phase in retirement a bit more complex but as well easy to learn with reading. Who would pay an advisor 25-30k/yr. No difference managing 1M or 5M
Docs, this is a really well thought through discussion. I looked into finding a financial advisor, but eventually just gave up. It was easier to just do it myself than locate someone I trusted. Payed a CPA to discuss tax strategies (such as Roth conversion) and estate lawyer to do estate planning.
As a sort of similar dilemma, how would someone who needed some sort of important surgery or cancer treatment go about locating the right doc for the job? This seems even harder than a doc finding a good financial advisor. I’ve seen cases of wildly different results from different treatment centers. Is there any reliable way of finding the right doctors for a problem? In a lot of ways, you are facing the same kind of dilemmas that are faced when trying to locate a financial advisor. Any thoughts out there?
Remember every patient is different and that explains a lot more of the “wildly different results” you see from the same disease. Every cancer is a unique disease as well as it involves a different mutation.
Here are two incidents I know about personally: A guy that reported to me (I was an IT manager) got a lump in his his neck that became painful. His family doc referred him to the cancer center that was part of the hospital chain he worked for, where they discovered it was cancer. They told him it was pretty bad, not to expect too much, and to get his affairs in order. His wife started doing all sorts of research, and eventually they went over to the University of Michigan where they had a center for head and neck cancer. They reviewed his case, told him they treated these all the time , and given his age and good health felt his chances were very good. They treated him, and he was (and still is) fine. Don’t know what would have happened at the other place.
My sister found a lump in her breast, and went to have it checked out. They discovered it was not breast cancer, but some sort of rare lymphoma. In this case, fortunately, they knew of a guy who sort of specialized in this particular cancer (he was in another town). He treated her and she is fine.
There is no way any doctor or treatment center can keep up with all the different kinds of cancer and new treatment protocols that are being developed. So, you have a certain genetic profile, your cancer has a certain genetic profile. How do you find the folks who are keeping up with the very best way to treat that specific patient & disease?
I had to have prostate surgery about 10 years ago. That’s another area where, as a patient, you are kind of lost. Do you go somewhere they are using the robot? Are their outcomes better? Do you want the urologist who does surgery as part of a larger practice, or do you want to find a practice that does nothing but surgeries? How do you make this sort of decision? Your urologist is likely to discount the robot and tell you he has great outcomes. But, how do I know that? Who is going to give you an objective answer? How about asking your family doc who works for the same hospital chain as your urologist? Is he going to recommend you go see the robot that works for a different hospital chain?
Wish I knew of a good way.
Maybe a urologist can answer your questions about robot assisted prostate surgery. Either way, your urologist is involved.
I am glad to have seen this article. For the record, I am a registered rep, a CPA, a PFS, and a CFA.
I believe that this whole “fiduciary” garbage is due to one thing–there is a group of people (the RIA’s) who want to get on their moral high horse and act like their God’s gift to the financial world by claiming that they are working in their client’s best interest, and anybody who has the ABILITY to receive a commission (like me) is trying to steal, cheat, and crook their clients’ hard earned money. (Nevermind whether or not I ACTUALLY receive commissions–the fact that I have the ABILITY is all that matters in their book.) The RIA’s like to tout the fact that they (and they alone) are held to the fiduciary standard–the highest standard in the book. That they have their clients’ best interest at heart, and that the lowly Registered Reps cannot (by definition) ever be fiduciaries, because of their agency relationship with their broker-dealers.
https://blog.xyplanningnetwork.com/podcast-blog/ep-127-alan-and-kitces-unhinged-fee-only-fiduciary-and-why-it-all-matters
The best explanation I’ve ever heard of this “fiduciary” crap is from Kitces on this podcast. I understood what he said, but I still disagree with the basic premise. Most of the “fiduciaries” are using NAPFA’s definition of the term, which basically means that the advisor does not receive a “commission” (even a levelized trailing commission), but rather, they get “advisory fees”. Poe-tay-toe, poe-tah-toe. It’s a distinction without a difference.
And it seems strange to me that a person can take ALL of the commission-paying products, throw them out the window, refuse to offer them to their clients, then say that makes them MORE fiduciarier. That effectively eliminates the possiblity of getting paid on life insurance, annuities, small accounts (a.k.a. A-shares), certain real estate products, and certain alternative investments. Now, whether or not these are appropriate for any particular client is another story. But not only are they appropriate in some situations–they’re downright necessary (like term life insurance for a young parent)!! And for a “fiduciary” to disregard them because they can’t get paid on them is NOT doing what’s in the best interest of the client. (And we all know that a professional will not spend much time, energy, or brainpower on something they can’t get paid on. Two things make the world go ’round–and money’s one of them. You can figure out what the other one is.)
Strangely, the AICPA, SEC, FINRA, and CFA Institute (the four authorities that I am subject to) do NOT prohibit commissions, nor do they draw a distinction between a “fee” and a “commission”. (Good reason to avoid the CFP program and NAPFA.)
The fact is–Registered Representatives (if they choose to put on a fiduciary hat) are subject to the exact same fiduciary standard as RIA’s. And for RIA’s to suggest otherwise is (IMHO) a lie straight from the pits of hell.
Rant over.
I disagree with you.
I prefer to see fee-only, fiduciary advisors.
Life and disability insurance can be outsourced, and there is even a little bit of movement toward non-commissioned products there.
Small accounts can simply be charged a fair hourly or annual fee.
The biggest problem I have with a commission model is that the worst products tend to offer higher commissions, and I think that’s a conflict of interest that even good people have trouble resisting. The low-cost, broadly diversified index mutual funds I generally recommend don’t pay commissions, so they’re not recommended by the “advisors” who work under that model.
And you know as well as I do that the vast majority of those selling commissioned products have never bothered getting a CPA/PFS or a CFA.
I just finished training this year and have been meticulously looking for how I should go about strategizing my finances. After reading this article and then the comment section below it seems there’s a mix of ‘financial planners can be helpful’ with ‘you can do it on your own if you know what you’re doing.’ The problem is I don’t know what I don’t know. How would I know that I’m not doing something wrong or that I’m missing out on potential ‘obvious’ opportunities if I’m blind to these things and just never knew to begin with. At the same time, the thought of paying someone to tell me what I probably was going to do anyway is also frustrating. Do even the ‘expert’ users of WCI use financial advisors or do most of you just figure things out on your own. Between my tax guy who is doing a lot of my LLC structuring and retirement account structuring I’m not sure what else I would need a financial advisor for since I plan to be doing mostly passive investment anyway. Loan repayment strategies or refinancing? Diversifying investments into other areas that I’m not aware of? I just don’t want to start a business relationship unless I know that the benefit will outweigh the cost. Any recommendations?
I’d say most just do it on their own, counting on their mistakes costing less than the cost of an advisor. You can always get a second opinion on your plan from an advisor or pay them an hourly rate for questions you may come up with. Or you can bounce it off a bunch of well-informed forum members and “crowdsource” the advice.
Most people in your situation tell me their confidence lagged their knowledge by about a year.
Bottom line: The financial advice area is such a minefield that I don’t think anyone needs to hire a financial adviser. I don’t believe that you have any other choice but to do it yourself. You may make a few minor mistakes but these pale in comparison to hiring a high fee conflicted or crooked adviser. Do not even consider hiring an “adviser”. There are too many sharks out there and they smell blood in the water. By the time you realize the smooth talking salesman is conflicted(all of them), incompetent, or crooked, or all 3, it will be too late.
I agree. There are a lot of sharks out there. I DEFINITELY appreciate this article because it takes more than COMPENSATION into account.
One “fee-only” financial advisor that I was speaking to kept trying to sell me on his compensation model (which was AUM AND Subscription model). He was clearly motivated solely by his OWN bottom line.
Although he MAY have done good work – he was really just a huge name-dropper/salesman. Compensation is ONE piece of the puzzle – but I needed someone more practical (not someone who brags about his OWN lifestyle). I felt like I was talking to someone trying to sell me Amway or some kind of pyramid scheme.
Fee-only isn’t the be-all, end-all. After my conversation with him – I was WAY more open to working with someone (anyone) else – and not ONLY the fee-only model.