Should You Use a Fee-Only Advisor?
October 02, 2014Last week, we discussed the dangers of using a commissioned-based financial advisor. One way to avoid those conflicts of interest is to work with a fee-only (not fee-based, which is fees PLUS commissions) advisor. Instead of selling investments for a commission, they typically charge a fee that’s a percentage of the assets they manage for you. You can search for a fee-only advisor through NAPFA, the National Association of Personal Financial Advisors.
While they don’t have the same incentive to steer you towards certain funds, I still think there are some problems with the asset-based management fee model. First, they generally have minimum asset levels so they typically won’t work with people just starting to build a nest egg. Second, there’s still a bias to invest with them rather than do something else with your money. In addition, many are tempted to use more active strategies than they should as a way to justify the management fee that they’re charging. (Why pay a 1% fee to have someone buy and hold a portfolio of simple index funds when you can easily do that yourself?) Finally, that 1% fee can be expensive and make a huge difference in your returns.
I think a better approach is to go with a fee-only advisor that charges an hourly fee or fixed annual retainer. They’ll generally work with you regardless of your asset level as long as you can afford the fee. They don’t have the same biases of what you do with your money or how it’s managed. And despite the sticker shock of writing that check, it generally comes out to be much cheaper than an asset management fee. You can find hourly advisors through the Garrett Planning Network and advisors with a fixed retainer (that usually also includes tax preparation) through the Alliance of Comprehensive Planners. The former is better for temporary “as needed” advice and the latter is better for more of an ongoing relationship.
Regardless of how they’re paid, you’ll also want someone who’s actually qualified. One way to do that is to look for respected designations like the CFP® or PFS marks. In addition, you should interview more than one potential planner and see who’s the best fit for your particular needs and personality.
What if you just want someone to help you choose investments and don’t want to pay for more comprehensive financial planning? Another option is to go to a discount brokerage firm like Charles Schwab, Fidelity, TD Ameritrade, Scottrade, or Vanguard. You can buy no-load funds from them for free or for a low transaction fee and they have representatives (all but Vanguard have branch offices you can just walk into) who can help you select investments at no additional cost. Just be aware that they may try to refer you to sign up for a managed account service or an investment advisor for a fee but you don’t need to do that.
Finally, if you are looking for more comprehensive financial planning guidance, see if your employer offers a financial wellness program like Financial Finesse. Make sure they are unbiased (don’t sell anything), qualified (should have a professional designation like the CFP® mark), and focused on behavioral change and actual results rather than just providing information. If not, it may be worth paying for a good advisor or learning how to plan and manage your own finances. Of course, the latter idea brings up the question of whether you can trust yourself with your money but that’s a topic for another day…