Financial Services
Why Fee-Only
After you discover the benefits of fee-only financial plans, you will wonder why you didn’t start years earlier. The best way to describe the fee-only financial advising advantage is through the story of two friends: Hubert and Jack.
Hubert worked with a planner from one of the big Wall Street firms. He felt their financial advising and the financial plans they offered 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 financial planner, the planner talked about how his firm has access to the best products for financial plans 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 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 about financial plans and the company’s style of financial advising. 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 financial advising because the planner earns the majority of his commission up front. 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 interest. 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? To uncover more about how Wall Street works, please review the following video now:
What Your Broker Doesn’t Want You to Know, Part one:
Part two:
