But the demand for impartial financial advice is growing faster than you can say “Find me a mutual fund.” And the brokers, accountants and investment hobbyists flooding in to meet it see fee-flacking as the quickest way to win cynical clients: hourly and annum rates are the “gimmick du jour,” says one.
The focus on charges is good news for the financially overwhelmed, but the growth is frighteningly fast. Fee-only planers have doubled their numbers and quadrupled the money they manage, according to Boston-based Cerulli Associates. And they can’t all be Warren Buffetts. If you’re looking for wise counsel, remember that a cleanly typed fee schedule doesn’t solve all problems. Here are some that remain:
Almost half of the people who call themselves financial advisers have arrived since 1990, and some have more investment experience than others. “When 45 percent of the planners out there have come in during the last five years, that’s scary,” says Kurt Cerulli. “I’m concerned about the guys who used to sell Veg-O-Matics.” This new breed can be spotted by their willingness to spout incomprehensible jargon. If they can’t explain it, maybe they don’t understand it, Look out, too, for pledges of 12 percent or better returns on the money they’ll want to invest for you, or for visible excitement about the latest hot investment. Others may push their five favorite funds on all comers, or lack the experience to stick to their own investment convictions. They’ll tend to follow the market by buying mutual funds after they’ve become trendy and selling good investments that might be temporarily unpopular. You don’t need a planner to buy high and sell low.
Seek credentialed pros with at least five years’ experience who have close ties to attorneys and accountants and will provide client references. Former brokers often make knowledgeable advisers: they had to learn all about securities before they could sell them.
Comprehensive cradle-to-estate planning is a dying art, Most advisers make their profits as money managers who take an annual cut of their clients’ assets.
If you want a three-ring binder full of strategies that balance your budget, cut your taxes, clean up your insurance and fund your Florida years, call the National Association of Person-al Financial Advisors, whose members commit to comprehension, at 800-366-2782. Expect to pay $2,000 to $4,000 for the book, and expect to pay that annual management fee, too, if you want your adviser to actually buy the investments he or she recommends.
Not all fee-earning advisers are the same. “Fee offset” planners set hourly fees and then use commissions to reduce them on the shaky theory that they have no incentive to push particular products. “Fee-based” planning is a term of art used usually by planners who charge fees to recommend products that then pay them commissions. “Fee only” planners claim to eschew all kickbacks, but not all are aboveboard. The most unethical may have second businesses through which they funnel commission-earning trades.
All those backroom relationships will show up on an adviser’s SEC Form ADV, Part II, which you can get from the planner the SEC Public Reference Desk at 202-942-8090.
Not all credentials are created equal, either. Most respected are certified financial planners (CFPs) and certified public accountants who are personal financial specialists (CPA-PFSs). Both must have solid planning experience and pass tough written exams, but neither is a no-commissions guarantee. States have been loosening the rules on fee-earning CPAs: more take commissions every year. Chartered life underwriters (CLUs) and chartered financial consultants (ChFCs) come from the insurance industry; a recent study shows their clients were much more likely to buy insurance for investment returns.
The National Association of Personal Financial Advisors screens SEC forms, requires certifications and experience, and reviews financial plans to ensure their members are what they profess to be. But membership is sparse and not necessarily in your neighborhood.
Research referrals, too. Charles Schwab is readying a national service for its own fee-only-advisers networks. Participants will have five years of money management, clean credit reports and college degrees. They’ll also be paying Schwab for your business.
An asset-management fee of i or 2 percent may make sense for the first round of fund-picking, but if you hold your investments for years, why keep paying?
Gregory Sullivan, a McLean, Va., adviser, tells of one client who had a 3 percent management fee on a portfolio that was half in U.S. Treasury bends. She could have paid any broker $50 to buy them for her.
Confirmed buy-and-holders can negotiate a flat fee for a one-time portfolio plan. Many advisers will charge between $75 and $200 an hour, and can do some serious fund-picking in four hours, says Sullivan. Buy the funds yourself and save years of management fees.
