Financial Services

Why Fee-Only

This is the story of two friends: Hubert and Jack. Each recently hired a financial advisor, but they had widely different experiences. Which experience would you rather have: Hubert or Jack's?

Hubert worked with a planner from one of the big Wall Street firms. He felt they must be good since the firm has branches nationwide, and their commercials displayed how they work with their clients to help achieve the client's goals. Plus, when Hubert met the planner, the planner talked about how his firm has access to the best products and employs the top analysts. Unfortunately, as Hubert signed the mountains of contracts required to open an account, he didn't notice the disclaimer that stated, "our interests may not be aligned with yours."

What Hubert, and the vast majority of Americans, didn't understand is the big firms employ planners or brokers to push the products from the firm's investment bankers. The lion's share of the firm's revenues comes from its investment banking arm. The investment bankers raise capital for companies by issuing stocks or bonds. So if a Company X needs to raise money to build a new manufacturing plant, they hire investment bankers to create bonds or stock. The investment bankers need people to buy these bonds and/or stocks, and that is where the broker enters. Hubert ends up with Company X's bonds or stock in his portfolio whether it suits his portfolio or not. And these top analysts the broker hyped are usually hired to produce glowing reports for the investment banking clients.

Hubert, again like most Americans, didn't know what questions to ask his broker. If he had, he would have found out the big firm planner had hundreds of clients, making it difficult for him to spend any real time on Hubert's account. Plus, the planner has little incentive to provide follow up service because the planner earns the majority of his commission upfront. The broker doesn't disclose his compensation to Hubert, but the broker can earn anywhere from 5-10% immediately on Hubert's account. If Hubert's account was worth $1Million, the broker made a minimum of $50,000 just to sign some paperwork.

Jack decided to work with a fee-only financial planner. Of the approximately 700,000 people who call themselves financial planners, only about 2,000 are truly fee-only - an exclusive group of planners. His fee-only planner is completely independent: no investment banks, analysts, or sales quotas. Jack's planner fully discloses all of his compensation and any possible conflicts of interests. Plus, his planner only has a handful of clients, rather than hundreds. He can only handle a select few clients because the planner focuses on more than just investments. He looks at all aspects of his clients' financial lives and works with his clients' accountant, lawyer, and other key advisors to implement the plan. And Jack sees his advisor regularly.

Which experience do you prefer with your financial advisor? If you want to learn more about the differences between the wirehouse brokerages and fee-only planners, please click here. For a list of questions to ask your planner, please click here.