Choosing a Financial Advisor (Part II)
I'll start off my second (and final) installment on selecting a financial advisor by reiterating by bias toward the "fee-only" method of compensation and, therein, toward "fee-only" financial advisors. My rationale is that the advise provided is likely to be MORE objective, and the total costs of the engagement are LIKELY to be less (than would be the case where compensation is to be derived from the "commissions" being charged, relating to the sale of products). One might expect that, as a "fee-only" advisor, I have an "ax to grind" and that it is rather self-serving for me to offer such a proclamation. My response would be that I have "gone both ways" (practiced as both a "fee" and "commission"-based advisor) and had I remained commission-based, I would have enjoyed a much more lucrative career (believe me). The "culture" just wasn't conducive to serving the client's best interests. I feel strongly that, by using a "fee-only" practioner, the client is able to significantly decrease potential "conflicts of interest". One area, that I'll use as an example, is that of "mutual fund" access (by the client), as they ("funds") serve as the investment medium of choice for the majority of today's investors. As a "real" fee-only derives no compensation from commissions (and is compensated SOLELY by the client, NOT by or through product vendors, mutual funds, or insurance comanies, the selection of mutual funds will be exclusively "no-load" (no sales charges). This is not to infer that a fee-only advisor is working for free; as fees will be assessed based on either an hourly rate or or upon a percentage of the client's "assets under management" (which typically range from .5-1.5% annually). By using pure "no-load" funds, the investor is in a position to avoid so-called "B Shares" ("load" mutual funds also offer "A" and/or "C" Shares, which I also discuss in my previous article), which assess very high annual expenses, and redemption (or "backend") charges. With "B Shares", while the investor doesn't actually pay a "front-end" sales charge (or "load") at the time of purchase, if shares are sold within a certain time period (usually six years), a "retroactive" sales charge is levied, and the investor pays much higher annual fees (than with a "no-load" fund) to cover what are referred to as "12b-1" fees--which can be as much as 1% a year. In essence, "B Shares" have basically been designed to deceive investors into thinking that they are buying a "no-load" fund, when they aren't. Today, way over 50% of all mutual funds charge "12b-1" fees, amounting to over $10 billion a year in fees to investors. While ten or twenty years ago, most sales charge were in the form of one-time "front-end" loads, today "12b-1" shares have replaced such commissions, in many cases. Realizing the prevalence of "B Shares" sales and their accompanying "12-b1" charges and recognizing that potential investors, in many instances just aren't aware of these hidden fees, the "Securities and Exchange Commission" (which regulates the mutual find industry, as well as financial advisors and brokers) is now seeking comment on whether to eliminate these fees. I agree with the position of federal regulators that the use of "B Shares" (by commission-based advisors and brokers) creates the potential for "conflicts of interest"; in that they are "enticed" into recommending funds that carry "12b-1" fees over funds that don't, due to the higher compensation received, and that such funds may not be the most suitable for their clients.
Let's stay with the topic of "mutual funds" for now, but switch the focus a little bit to another area for which "conflicts of interest" abound, but having to do with the yet another incentive for advisors who are compensated by commissions to "favor" certain funds due to the higher compensation rewarded them, a sales practice now also under scrutiny by the "Securities and Exchange Commission", known as "revenue sharing". Under this arrangement, certain mutual fund companies provide those who sell their products a portion of the fund's management fees as an inducement to favor their fund(s) over those of their competitors. This past November, one of the nation's largest brokerage firms agreed to pay $50 million to settle "SEC" allegations that it's sales force didn't inform its customers about such "revenue-sharing" arrangements, as well as other incentives to sell certain funds. The problem here is that under existing federal securities laws, financial advisors are held to a "fiduciary" standard of conduct, and are required to either offer objective advice or properly disclose any serious conflicts. Unfortunately, this just isn't happening in far too may instances. As fee-only advisors are compensated ONLY by their clients, and prohibited from accepting any such "kickbacks", they are better able to place the interests of their clients before any monetary interests of their own. Recognizing the potential "conflicts of interest" between an advisor who accepts such fees (from mutual fund companies) and the mutual fund investor, and that the investor needs to better understand that specific fund recommendations are affected by these payments, the "SEC" is now considering rules that would require disclosure of "revenue sharing" on the confirmation statements provided investors upon purchase of a fund, as well as any other incentives or inducements to sell a particular the mutual fund. According to a recent article in "The Wall Street Journal", the "SEC" is conducting enforcement investigations of eight brokerage firms and 12 mutual fund companies to determine the extent of any such improprieties, and also conducting examinations of "dozens and dozens" of advisor and broker-sold mutual funds (those that carry sales charges).
In wrapping up, PLEASE find yourself a financial advisor who has your best interests at heart. I'd be the first to admit that there are both very competent, fair, and honest commissioned-based advisors, and very INcompetent, UNfair, and DIShonest fee-only advisors "out there" but that, on balance, potential "CONFLICTS OF INTEREST" are significantly reduced in the fee-only world. Websites to at which to begin your search for an advisor include those offered by The National Association of Personal Financial Advisors (www.napfa.org), the American Institute of Certified Public Accountants (www.cpapfs.org), and the Garrett Planning Network (www.garrettplanningnetwork.com), the Certified Financial Planner Board of Standards (www.cfp.net), and Consumer Reports (www.consumerreports.org). As I recommended in my previous article, choose a CERTIFIED FINANCIAL PLANNER™. Holding this certification indicates that the advisor has at least taken the time and initiative and made the effort to expose herself to an educational program which provides a certain level of knowledge relevant to practicing in the field of "financial planning". As there are hundreds of "financial advisors" to choose from, there's no reason to choose an one who's been in business for less than five years, nor one who who doesn't have a track record of serving clients with similar needs to yours. Ask for background information, interview several candidates, ask for references, and do everything you can to establish the piece of mind that your advisor will be working in YOUR best interests. After all, your financial future might very well depend upon it.
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