Beyond Simple Financial Management
Fee-only vs. Fee-based
Some advisors will say that they work on “fees”, but the question is are they “fee-only” or “fee-based”? Fee-only means we do not receive any commissions for any products and solutions that we recommend. Fee-based means that the advisor may receive commissions and as a result, there may be some concern about their objectivity. (See “Fiduciary”)
When might it matter?
Consider “Chris”, the successful entrepreneur who has most of her net worth tied up in her business and not much to invest in traditional investment products. She meets with the fee-based advisor who only gets paid if there is money to invest or insurance to buy. The fee-based advisor does some basic “needs-analysis” work and ends up recommending higher commission insurance products to help compensate for their time with Chris, but now their work is done. One might argue that the insurance was “suitable” but was it best for Chris? (See “Fiduciary”)
The fee-only/fiduciary planner meets with Chris, creates a comprehensive financial plan, determines that there is tax planning, insurance planning and other areas that Chris needs to address. They provide specific recommendations as a result of a thorough, objective analysis for which they were paid a fee, regardless of whether or how Chris implements the plan. From there, they can work in collaboration with Chris and the insurance advisor that she has been recommended to create the right plan for her needs without a conflict of interest on the part of the fee-only planner. They will continue to be compensated to provide objective advice based on what Chris needs regardless of how it is implemented. In short, they are her planner for life, not just the next product or “need”.
As an independent firm, our responsibility is to you, the client. Based on the comprehensive plan that we create with you, our firm is free to choose who to access and partner with to meet your needs. Because we are an independent firm, we have multiple options for managing your portfolio. And sometimes, the best answer is to leave the money where it is…that’s true independence.
When might it matter?
Let’s look at “Sally & Bill’s” situation…they are getting ready to retire from their corporate jobs and start a new chapter. They have a lot of money tied up in their corporate 401k plans in addition to an outside investment account that they have built up over the years. Sally’s 401k plan is at a firm where the administrative and internal management fees are very low cost. It may not make sense to move the money to investment management with their financial planner right now (but that may change as they begin to take Required Minimum Distributions). On the other hand, Bill’s corporate 401k has higher fees and does not offer competitive options. Their joint investment account is invested at a firm where they see their advisor infrequently but pay 1%/year on the portfolio. An independent, fee-only, fiduciary planner may decide that perhaps it makes sense to rollover Bill’s 401k assets under their management, looking for ways to keep the internal and external costs as low as possible. That same planner may feel that Sally’s assets are best left where they are with some monitoring from the planner on an annual basis. And depending on the service and advice they get from the other advisor, it may make sense to take over management of the joint investment account. The bottom line is: what makes the most sense for Sally & Bill?
A non-independent advisor may feel some pressure to bring ALL assets over to their management because of their broker-dealer’s requirements for asset growth each year. To be appropriately compensated, the advisor MUST invest the client’s money with their broker-dealer or face consequences for “selling away” from their firm, whether or not the costs and returns are competitive. The lack of independence means that Sally & Bill don’t have as many options and may pay more.
Often you may hear that an advisor or planner does “comprehensive financial planning”, but what does that really mean? Comprehensive financial planning looks at the following areas of your financial situation:
- Cashflow Planning
- Tax planning
- Retirement Planning
- Education Planning (if needed)
- Investment Planning
- Insurance Planning
- Estate Planning
Most importantly, a comprehensive financial planner considers how these areas impact each other. Certain strategies within the investment plan may positively or negatively impact the taxes paid by the client. Understanding how all the pieces fit together and interrelate is a critical part of comprehensive financial planning. Ongoing monitoring is also part of good financial planning. There are many “moving parts” and assumptions that are made in planning projections, so planning must be an ongoing process that is revisited to make sure the expected results are still as expected. If not, adjustments may be needed.
When might it matter?
“Deborah” is a recent inheritor of her parents’ estate. She is still reeling from their deaths last year and there is much that is changing in her life. She is now in a situation where she no longer has to work and isn’t sure how to proceed. Deborah connects with an advisor recommended by a friend. The advisor suggests that she move the inherited portfolio over as soon as possible so she doesn’t have to worry about it. The advisor runs some quick numbers for retirement and tells her she is alright, then they proceed to reposition the entire portfolio creating a lot of gains. Deborah is shocked to find out the next year that she owes a lot of taxes. Had she known, she might have made some different decisions in terms of charitable giving before the end of the year.
What if instead her fee-only fiduciary planner guided her through a top to bottom review of where she stands financially? With the help of her planner, she could have engaged new tax and estate planning advisors and slowly begin to work through the recommendations from her initial, comprehensive plan. Along the way, they identify some opportunities that she can take to minimize taxes as she and her planner begin to shift the portfolio to a strategy that fits Deborah’s needs. A year later, much has changed in Deborah’s life and she has decided to move to a new state, get married and begin some charitable gifting. Without a comprehensive plan looking at all aspects of what will change for her, some opportunities may be missed or mistakes made that could cost her additional taxes or higher expenses later. Since she is in touch with her comprehensive financial planner regularly, they are able to navigate her changing life and what needs to happen next to ensure that she stays on track for future retirement and makes the best of stewarding her parents’ inheritance. In short, it’s not just about the investment portfolio she inherited, there is much to consider in a solid financial plan.
Holistic goes deeper than just the numbers and the technical aspects of your plan and financial situation. Through a thoughtful and inspiring process, deeper goals and important passions can be discovered and fleshed out to become the basis for the comprehensive financial plan. Sometimes what brought you in for financial planning may evolve into a new direction or opportunity you may not have thought possible. With a deeper understanding of who you are, we are able to customize our advice, coaching, and support of you as you work towards achieving your vision for the future.
When might it matter?
With the inheritance “Deborah” received from her parents, she knew she didn’t need to work and a new life was possible. For a while, she had dreamed of starting her own business that helps impoverished women in Africa begin to build some financial security for themselves and their family. She had no idea where to start. With the help of her financial life planner, she was able to clarify and articulate her dream, then build a plan that supported starting this business while also making sure she would be financially secure in the future. Her planner helped Deborah work in coordination with her other advisors to navigate some of the tax and legal issues of starting this dream business, while also being a “thinking partner” to her as she hit the inevitable ups and downs of business ownership. The portfolio was structured to support her lack of earned income as she started the business and her benefits and insurance were carefully reviewed before she left her job and began life as an entrepreneur. In short, Deborah got the holistic AND comprehensive planning advice she needed to realize a lifelong dream.
Had Deborah gone to a traditional advisor, the process would likely have been a more skin-deep analysis of her needs and (traditional) goals like future retirement, maybe buying a new house and certainly getting her portfolio repositioned. In short, the “plan” might have been based more on what her advisor thought she “should” do, not what she really wanted to do.
What’s your dream? How can we make it happen?
Putting your interests before ours is not always easy, AND it’s the right thing to do as a fee-only, independent CERTIFIED FINANCIAL PLANNER™ Professional. It takes an objective process, a system of checks and balances where we can assess what the options are, look for biases in our analysis and recommendations, make sure we understand you and your needs as well as possible AND THEN, recommend the best option(s) for you whether it’s the investment management of your portfolio, insurance products to meet your needs or where you keep/hold your cash assets. While our investment partner may want us to bring your assets to their platform, if it doesn’t make sense both in terms of costs & the services and value you will get, then maybe the money needs to stay where it is. That’s less revenue to us, but it’s the right thing to do as a fiduciary.
When might it matter?
As a successful entrepreneur, “Chris” really needs advice around everything from cash flow and debt management to investment strategy on her 401k, and insurance for the business and herself. As a solo entrepreneur, she could leave her solo 401k at a low-cost investment management provider or have her advisor take over management of it. A traditional advisor only gets paid on assets they manage or commissions paid on the investments they recommend, so even though it would be “better” for Chris to leave her solo 401k account where it is, they recommend transferring their assets to their firm. Now, Chris has higher external and internal expenses which means less of the money she makes goes into her pocket. In addition, because she doesn’t have a large account, the advisor isn’t able to spend much time with her each year and she isn’t getting advice on the other areas of her financial and business situation except when it involves additional products that can be implemented.