Consumers shop for a financial planner often based on the fee structure of the firm, but is that the most important quality?
Fee only means more than one way to pay.Should you select a financial planner based upon the fee structure alone? Fee-only can mean a retainer, a per-hour fee, and assets under management ("AUM") or any combination of the above. Fee-only is distinct from fee-based which means an advisor can take fees from all of the above plus commissions and trailers (commissions from products sold in years past). I advocate fee-only because it greatly reduces the potential for conflict of interest by steering clients away from commission-based products to products that do the same job, but at far lower consumer costs. I personally use an hourly fee for the short term when developing a financial plan, for example, and a flat retainer fee for ongoing annual services. This way all of the planning work is paid for equally and is not biased by a payment scheme. This is opposite investment services paid for by an alternate AUM arrangement which may get the lion's share of the attention at the expense of neglecting other valuable services such as refinancing a home, or retirement planning.
An argument of having a fiduciary on your side: What's more important than fee structure? I think it's to focus on a professional fiduciary relationship. That means, in the simplest terms, that the financial planner employs all of his or her skills, knowledge, experiences and training to walk in the client's shoes and make the best possible decisions by always putting the client interests before his or her own in every decision affecting the client's financial well being. It also means disclosing every single instance where any shortcoming exists between fiduciary standards and actual circumstances or actions. You won't find this standard offered in the vast majority of services offered by so called "financial advisors". Then, what would you look for?
Consumers can look for the CERTIFIED FINANCIAL PLANNER, or CFP (R) mark of a professional financial planner as a minimum standard of whom to consider for financial planning services. The consumer can at least rest assured that such a planner has already met and continues to follow, the fiduciary standard. Focus on fiduciary means putting all clients first and foremost - always. Had that been the industry-wide standard in 2008, which among other things, forces financial planners to fully disclose risks, can you honestly convince yourself that we'd be in the global financial nightmare today? Not likely: A fiduciary has the responsibility to steer all clients clear of inappropriate investing. With rare exceptions, the polymorphic, smoky derivative markets that sparked the financial tailspin in 2008 would have been fallen in that category and they would have been considered far too risky for most client portfolios. In sum, the consistent practice of the fiduciary standard would mean no Madoffs, no morasses, and no more messes. Fiduciary means the client is always first, not the pockets of the financial servicer.
It sounds like another world, and yes, it truly could be if consumers just focused on fiduciary - and of course, fees.
Full Disclosure: Steven Wightman is a NAPFA Registered fee-only financial planner who occasionally writes for the NAPFA ADVISOR, the member's magazine.
