Fee Only Financial Planner

Posted Saturday, September 15, 2018

When is the last time your financial advisor discussed fees? Sure, they probably did it in a round about way- they are required to. When is the last time your financial planner advocated rental properties as an asset class in your portfolio? Probably never. Why? They don’t get paid to have you invest in a rental that might earn 12-15%. And why is that? The system is broken, and consumers are now demanding fee only financial planners.

A fee only financial planner is someone who charges a fee that is disclosed upfront in big bold letters. It is not tucked away or buried in a myriad of internal fees. It might be negotiated. It might be a flat fee. The fee is definitely not confusion, and the benefits are huge.

Most financial advisors or investment firms will charge a commission or an investment fee. For example, if you walk into Charles Schwab and want to invest a $1,000 into a mutual fund, there will be a commission paid to the advisor of about 6%. Is this the right investment for you? Perhaps. But if you elect to put the $1,000 into a savings account because you need to bolster your emergency fund, the advisor doesn’t get paid. So what do you think the recommendation will be between a mutual fund and an emergency fund? Advisors have to eat too.

Conversely, a fee only financial advisor gets paid for his or her advice. Not for the transaction. If you engage a fee only financial advisor, and you ask about where to put your $1,000, the advisor does not have an incentivized recommendation. He or she gets paid the same, regardless. If you have a $100,000, it still doesn’t matter. Buy a rental? Buy gold? Buy an annuity? Buy life insurance? It doesn’t matter.

A fee only financial planner will work with you to determine the best possible investments and portfolio for you, and you alone. This type of engagement creates what is called a fiduciary relationship- one where the advisor or planner has a duty to do what is in your best interest today and also in the future through periodic meetings. Everyone says they have your best interest in mind, but when commissions and bonuses start flying around, it can be disconcerting.

A fee based financial planner is someone who charges a fee similar to the example above, but will also from time to time collect a commission on a certain product. A great example is life insurance. Instead of referring you to a third party, a fee based financial planner can work with you to determine the amount of life insurance that is necessary and then also connect you with that life insurance directly.

Since the life insurance companies pay a commission, your fee only financial planner becomes a fee based financial planner since there is an element of commission. Is a fee based advisor bad? No. But you should understand the differences so you can ask the right questions. “How much are you getting paid for this policy?” is a fair and reasonable question. If your financial planner is a great fee based financial planner, he or she will state this right away, and take the issue off the table so-to-speak. Why make the situation uncomfortable?

This image is a bit misleading. Your fee based financial planner does not have to collect commissions on mutual funds or annuities. But you get the idea.

Most financial investment companies such as Charles Schwab, Fidelity, TD Ameritrade, Morgan Stanley, Ameriprise, etc. are both broker/dealers and investment advisors. What is the difference? And why is it a big deal? Let’s talk about it.

A broker is an entity that connects the buyer with the seller. Think of real estate brokers. A dealer is an entity that warehouses or inventories their own product and sells directly to the buyer. Think of car dealerships. If you were to combine a real estate broker with a car dealership you would get the sleaziest people alive. Just kidding… you would get Schwab, Fidelity, TD, etc. Perhaps we were right earlier… nah, we’re still kidding.

When TD Ameritrade sells a TD Ameritrade mutual fund, they are acting as a dealer (selling their own stuff). When TD Ameritrade sells a Fidelity mutual fund, they are acting as a broker (selling someone else’s stuff). Either way, the agent or representative is collecting a 6% commission upfront (assuming A share mutual funds). But, there might be more incentive for the agent or representative to sell the “homegrown” mutual fund such as bonuses, accolades, pats on the back, stage walks, etc. These compensations are not typically disclosed.

At the time of sale from a broker/dealer, the investment product must be suitable for the investor. Suitability is the big buzz word for broker/dealers. However, it is only checked once- at time of initial sale. So, if you have $50 per month going into the same mutual fund for 50 years, that is completely fine with the regulators since 50 years ago it was suitable. The system is broken.

Most big-shot broker/dealers are also registered investment advisors (RIA). Investment advisors are simply consultants. They create financial plans, monitor your portfolios and make recommendations. They charge a fee for this service, usually as a percentage of assets under management (AUM). In a overly simplified example, if an RIA recommends you buy a Schwab mutual fund in your TD Ameritrade account, there is not transaction fee. Mutual funds come in all “classes” such as A, C and I. “I” is for institutional which means there is not a commission being charged by the transaction.

If nobody works for free except the lady to the left, how does the mutual fund seller make money? They rely on volume and slim margins, and charge either a flat fee or a tiny percentage directly to the RIA. And the RIA absorbs it (typically) within the fee they are charging you. But since the investment advisor (RIA) is not incentivized by the brand or type of investment product through commissions, their advice appears more pure.

Since the investment advisor (RIA) relationship is considered ongoing and long-term, the buzzword is fiduciary (versus suitability under the broker/dealer transaction). Remember, suitability is a one-time thing at the point of investment- while it might have a forward looking perspective built in, it does NOT have a re-assessment perspective built in.

Many traditional financial advisors for the Schwabs, Fidelities, TDs, Ameriprises, Morgans, etc., are tired of this broken system. They are strapped by the commission based world since account minimums and other internal rules prevent them from dodging the commission based compensation plan. As a result, many are leaving the broker/dealer – investment advisor combination world, creating their own registered investment advisor firm and becoming fee only financial advisors.

How does this look? Jason and Tina Watson, founders of WCG (formerly Watson CPA Group), did just that. They created One Call Capital Group, a Colorado Registered Investment Advisor (RIA). OCCG charges a flat fee for a variety of services such as-

• 401k analysis
• active management, auto balancing
• audit representation
• beneficiary review
• capital gains simulations
• custom portfolios
• debt reduction analysis
• document storage
• education planning
• estate taxation and planning
• financial planning
• household reviews
• insurance review (life, health, property and casualty, disability, long-term care, umbrella)
• pre-retirement (projections, transitions, cash flow analysis)
• rebalancing
• rental property investment analysis
• rmd calculations
• tax modeling
• tax preparaton

Depending on what you need and how often you need it, your fee would vary (typical range is $2,000 to $8,000). It has very little to do with how much money you have- it has everything to do with how much work you want from One Call Capital Group. Said in another way, it is really ten times more challenging to manage $10 million versus $1 million? Of course not. Why should your financial planner make ten times more then? You’re right- they shouldn’t.

Truth to be told the toughest is the 60 to 65 year-old who is freakin’ out about not working anymore- monthly meetings, hyper-active scenario analysis, what-if’s galore, etc. What is just as tough is convincing clients they might pay less- we hear things like “I don’t pay an investment fee” or “I only pay a $1,000 a year.”

Seriously?! First, do you think anyone works for free? And if they do, what is the incentive to attract clients, do a great job and retain those clients? None. The notion of not paying a fee for investment advice is just silly. Second, most firms will charge anywhere from 0.7% to 1.3%. Using the average of 1%, a $1 million account will pay about $10,000 in investment fees. $2 million accounts will pay about $15,000.

Fee only financial planners will draft the fee from your investment accounts just like other broker/dealer or investment advisors. Here is the cool thing about this- if you have to pay a fee regardless, it should be paid from a tax-deferred investment account. This gives you a tax savings since the account value is slightly reduced. Otherwise, if you pay for investment fees directly, they are subjected to the 2% adjusted gross income threshold and generally not deductible for most people.