To learn about the importance of working with a Fee-Only Financial Planner click here.
Why “Fee-Only” Matters
Many of our prospective clients ask us about the Fee-Only Financial Planning concept and why it
matters. So, here’s just one example.
Recently we had lunch with a salesman to discuss an alternative investment involving real estate. It
sounded very intriguing and might be a worthy investment for some clients in the future. Unlike a
mutual fund or ETF, the internal expenses associated with this type of investment usually aren’t clearly
spelled out. Much “due diligence” is required, so we probed him about the investment’s fee
structure. He informed us that our commission on the investment would be 7%. It was at that
moment that “fee-only” really mattered to us and our clients.
See, true “fee-only” planners and investment advisors can only be compensated by their clients. This
excludes commissions paid by brokers, investment companies, insurance companies, or any other
outside agents soliciting their business. Given the desirable financial incentives of commissions, “fee-only” planners are not common.
As fee-only planners, we average less than 1% per year in
compensation for managing client investments. So for us to earn 7%, it would take about 7 years of
management to equal what we could make up front by purchasing this investment with our clients’
funds. In dollar terms, if we worked for a few weeks to convince enough clients to buy one million
dollars (a small percent of our assets under management) of the product, we would make $70,000.
Instead, we will work for our clients for years to earn this amount on the same size assets.
Sadly, most investors give little thought to the hidden costs they pay when an advisor recommends
stocks, annuities, or insurance policies. Investors just don’t realize they are padding the advisor’s
wallet with plump, front-loaded commissions. Most investment advisors work for a brokerage firm, an
insurance company, a bank, or independently with their primary source of income being commissions
(Merrill Lynch, Edward Jones, Goldman Sachs, Ameriprise, etc.). Because these advisors’ and their
firms generate their incomes by means of commissions, their goal is to maximize and churn trading,
which is the unethical practice of excessively buying and selling investments in a client’s account.
Due to the obvious conflicts of interest in providing financial and investment advice to people you are
selling products; many have migrated to a “fee-based” model. This term often confuses the public
into thinking it’s free of commissions. In fact, this means they charge fees like a “fee-only” planner,
but can also make commissions! For instance, when an advisor sells an “A” share mutual fund to a
client or purchases it for their account, a commission is generated. This “front load,” often 5%, is
rarely mentioned to the client. In the opening example, if we were “fee-based” we could have
accepted the commissions and charged our regular fees. Not exactly a great deal for our clients,
While “fee-only” doesn’t guarantee honest advice, excellent service, or positive investment returns, it
does show a dependency upon these factors for the business to be successful. Over the long-tem, if
our clients don’t see the value of our service and trust us, they will leave, and our business will fail.
Commission driven firms can prosper even if many of their clients aren’t financially successful. They
just need new clients to replace the old ones. Since the advisors’ income is primarily front-loaded,
finding new clients eclipses the need to take care of current clients (unless they can keep the current
clients switching products to generate new commissions).
Back to our original story…does this mean our clients can’t invest in a good opportunity if there are
commissions involved? Of course not. In this example, we can still purchase the investment and
simply wave our right to the commission. The result would be our clients getting 7% more of the
investment for their hard-earned money. Of course this does raise the question of how much of a cut
the salesman would get. And this is why “Fee-Only” matters.
As Fee-Only advisors we are proud to be members of the National Association of Personal Financial
Advisors (NAPFA). NAPFA members are held to the Fiduciary Standard and must meet arduous
requirements to be part of the organization.
By: Glen Martin @ Horizons Wealth Management
Do you have money to invest, but you’re not sure where to put it? The stakes are so high in investing that you should consider fee-only planners. They’ll give you a fixed price up front for their services, regardless of the product they recommend. You won’t have to worry about conflict of interest.
Click here to learn why you need a fee-only financial planner.
SUPREME COURT RULES WORKERS CAN SUE OVER HIGH 401(K) FEES
On Monday, The Supreme Court of the United States ruled that workers can sue their employers over high fees in their 401(k) plan offerings. Workers have complained for years about being forced to choose high fee investment options in their 401(k) plans because of a lack of other options. In a 9-0 decision, the justices decided that employers could be sued if their retirement plans offer employees mutual funds with unnecessarily high fees.
Learn More Here.
You may have been hearing the term ‘fiduciary’ more often recently; consumers are increasingly aware of the fact that not everybody in the financial services industry acts in the best interest of their clients. Unfortunately, the financial and investment world is full or corruption, greed, and lack of transparency. At Horizons Wealth Management, we have noticed that more and more individuals are doing their own research and seeking out Fee-Only advisors who adhere to a ‘fiduciary standard.’
So, what is fiduciary? Investors should really pay attention to this topic. A fiduciary is someone who is required, by law, to act in the best interests of their client. Attorneys, accountants and even real estate brokers acting on a client’s behalf must act as fiduciaries. But in the financial services world, it’s not always clear who is and who is not a fiduciary.
Anyone can make the claim to be a financial planner. The neighborhood stockbroker may call themselves a ‘financial advisor’ and be a pillar of the community. Your insurance agent may have managed your homeowners and auto policies for years, but should they be advising you on your investment and retirement accounts? Are they salespeople or fiduciaries? The truth is, neither of these professionals are bound by law to act with your best interest at heart. Getting financial advice from a sales person may cost you a lot more than just the front-loaded commission dollars.
The stockbroker, for instance, may recommend that you invest in a security when there are others that are a better choice. This is legal, as long as the recommended security meets a ‘suitability standard,’ that is, it is a suitable (but not necessarily the best) choice. This naturally creates a conflict of interest when the stockbroker stands to gain a higher fee from the second or third best choice but still ‘suitable’ security. Brokers are not even required to provide up-front commissions and fee disclosures to their clients. 75% of financial advisors are held to this low ethical suitability standard!
A fiduciary, on the other hand, is legally obliged to recommend that you invest in the security that – in their professional judgement – is the best choice for you. Plus, all of their fees are transparent and disclosed in the initial meeting. They are not pressured to sell any particular product and they do not receive commissions or referral fees from any outside parties.
A fiduciary isn’t necessary for every financial transaction. For example, individuals managing their own investments may be just as satisfied to buy and sell securities through a broker, and we all deal with insurance brokers who are paid on commission or insurance agents who sell their company’s products. However, consumers should use caution when making financial transactions with someone who is not a fiduciary.
Two-thirds of advisors charge both fees and commissions so they can call themselves “Fee-based,” but they are not true Fee-Only planners. Most of these fee-based advisors work for big brokerage firms where big commissions are still a large part of the business.
When you consult with a financial advisor who is fiduciary you can be assured of receiving the best and most objective advice for your situation. We recommend that when meeting a financial advisor for the first time, you should ask these questions:
· Are you legally obliged to put my best interests ahead of yours?
· Will you be serving as my fiduciary? Will you sign a fiduciary oath?
· Are you fee-only or fee-based? Explain your compensation method.
· What licenses do you hold? A Series 7 License means the advisor is a registered stock broker. Having an insurance license means he/she can sell you annuities and life insurance
policies and accept commissions. There is clearly a conflict of interest if the advisor has a combination of these licenses.
· Do you receive any commissions or referral fees?
· Are you a registered investment advisor?
As an independent fee-only firm, Horizons Wealth Management commits to acting solely in the best interests of our clients. All three of us hold the Certified Financial Planner (CFP®) designation and we are also members of NAPFA, which is the country’s leading professional association of Fee-Only financial advisors. These associations require that we adhere to the highest professional and ethical standards when advising our clients, and we work diligently to earn and cultivate their trust.
Who’s looking out for your 401(k)? Do you know who is legally responsible for plan losses and excessive fees? Do you understand the fees being charged to your account? When was the last time you checked the fees on your 401(k)?
All too often, workers with 401(k) accounts are in the dark. They view their retirement plan as a benefit and are unaware they’re paying for the privilege of investing for retirement. Many times, the 401(k) plans get neglected or pushed to the bottom of the list because the owner and Board of Directors are too busy with other tasks.
Many investors don’t realize that more than a half a dozen fees may be charged against their 401(k) account for recordkeeping, administration, investment advisory, brokerage and management services. These are often shaved off the top of the account’s investment returns, and never before seen by the 401(k) participants.
The Federal Government has been trying to enforce new regulations that require 401(k) plan providers to spell out the hidden fees workers pay. The push for greater disclosure has been in the works for several years, and it has been a struggle.
Unveiling investment expenses is particularly important for 401(k) participants in smaller companies. That’s primarily because many companies, especially small businesses, do not want to pay the thousands of dollars of operating costs; therefore, they set up retirement plans in which costs are paid by workers out of their investment returns.
All of this discussion is critical because 401(k) participants who pay just 1 percent more in fees see a significant impact on their retirement balance over their working careers.
Revealing these costs should cause workers to push their employers for a less expensive plan. That’s the takeaway for employees in all this. They should look over their reports and if they feel they’re not getting enough information, push for more. If they find their fees seem higher than average, they should talk to their plan administrator about lower fee options.
At Horizons Wealth Management, we feel certain that we can provide a better retirement plan for much lower costs. We would be grateful for the opportunity to run a free cost comparison and analysis for your company to illustrate how much could be saved in your retirement plan fees.
Tony Robbins recommends this short video clip in his new book, Money: Master The Game. This is a great explanation of the difference between brokers and financial fiduciaries. Most brokers call themselves “financial advisors” or “financial planners,” but less than 10% of them are actually fiduciaries. Robbins advocates for using an Independent Fee-Only Fiduciary in order to protect investors from deceptive sales practices.
This clip here gives a nice break down of why.
The fact is, anyone can claim to be a financial advisor. There is a big difference between stock brokers, insurance agents, salesman, and CERTIFIED FINANCIAL PLANNERS. Do you know the difference between fee-only and fee-based? Does your financial adviser sell products to make commissions? Fee-Only advisers do not sell any financial products! To bring awareness to this confusion, the CFP Board recently conducted an informal experiment. Would people possibly mistake someone completely unqualified to handle their finances for a qualified financial advisor? The results are alarming.
The CFP Board created a fake financial firm on the 48th floor of a prominent office building. The firm’s key feature? A conference room constructed with fake walls, two-way mirrors and six hidden cameras. Once everything was properly set up, they invited various people to receive a brief presentation from a man claiming to be a financial advisor. In actuality, he was a professional DJ equipped with little more than a few financial-sounding phrases and a personable demeanor. The lesson here, not all financial planners are what they appear.
If they’re not a CFP® pro, you just don’t know. CFP® CERTIFICATION is recognized as the highest standard in personal financial planning. Not all financial planners are FIDUCIARIES. Work with professionals who are required to put your needs before their own. We adhere to the highest standard a Fiduciary can and do not combine product sales with advice-giving. If they’re not a CFP® pro, you just don’t know. Find a CERTIFIED FINANCIAL PLANNER™ who’s properly vetted. CFP®: Work with the highest standard.
Horizons Wealth Management provides Fee-Only financial services customized to meet each client’s unique needs. The result is unbiased financial advice from professionals who are committed to acting as a fiduciary in a client-centered relationship. We analyze all aspects of your finances to design a roadmap to help you reach your financial goals and provide you with peace of mind.