Wednesday, December 7, 2011

What Is Your Financial Advisor Costing You?

If your “Financial Advisor” gets paid by selling you financial products, like mutual funds and insurance policies, how do you know what they are recommending is in your BEST interest or theirs? You don’t!!! This is a major problem within the financial services industry. But you do have another alternative!

Traditional financial planning is the source of most of the stress that people feel in their financial lives. The term "Financial Planning" is often used by self-proclaimed Financial Advisors as a marketing tool to sell financial products and generate commissions on the recommendations. The individual working with the Financial Advisor generally has almost no way of knowing whether the recommendations are in their best interest or the best interest of the advisor. They also have little way of knowing whether the products could have been obtained elsewhere at lower cost. This is because the majority of Financial Advisors actually work for a mutual fund broker/dealer or an insurance company, and don't really work for the client. The brokerage firms and insurance companies actually control what products can be recommended!

Most believe that if you want to work with a Financial Advisor, that you must work with someone that ultimately gets paid by selling you mutual funds and insurance products. That is completely FALSE!

A better alternative to remove conflicts of interest is to work with a Fee-Only Financial Advisor. Fee-Only advisors do NOT sell financial products or accept commissions. They work for the client and usually are fiduciaries. Meaning they must only make recommendations that are in your best interest.

You will also get more comprehensive advice from a Fee-Only Advisor. Why? Because the commission guys only get paid by selling you investments and insurance policies. Their advice will always relate back to the products they want to sell you! They have ZERO incentive to help you with your budget, your estate plan, your tax return, reducing your debt etc. All they care about is telling you that you have done everything wrong up to meeting them, and they can solve all your problems if you just buy the products they recommend. A fee-only advisor will help you with your entire financial life and be your coach along the way.

So what is the cost of working with someone that gets paid a commission versus someone who only gets paid a fee? Well, I know firsthand because I started out on the commission side of the business in 2001. I was always fighting an ethical battle with my employer’s management. I quickly realized that there is NO way to avoid conflicts of interest when you work for a broker/dealer or an insurance company that makes its money by their advisors selling financial products. 

Let’s look at an everyday married couple as an example:
75k of Household Income
50k of Investable Assets (IRA’s, College Plans, Non-qualified Accounts)

Costs of the Commission Model:
·         On $50,000 of investments you will typically pay a sales commission of 4.5% = $2,250

·         Mutual funds also usually cost you more each year when working with a commission advisor because they have NO incentive to make sure your mutual funds are cost effective. The 2010 industry average mutual fund expense ratio was 1.15%. Vanguard, a top NO Load mutual fund company, had a 2010 average expense ratio of 0.21%. Let’s not forget that load or commission mutual funds have what’s known as a 12b-1 fee that the commission advisor gets paid each year. All this equates to an additional $595 per year.

·         How much more in taxes will you pay since the commission advisor has no incentive to help you with tax planning? And probably knows nothing about tax planning! Let’s assume you only miss just 1% in overlooked deductions each year = $750

·         How much more will you spend because no one has helped you develop a realistic budget? Commission advisors are only paid when you buy financial products. What incentive do they have to help you budget? NONE! If you had a coach to hold you accountable could you save at least another 2%?  = $1,500

      How much are you wasting on unneeded insurance premiums because you don’t have an advisor that examines all your insurance needs? (auto, home, life, disability, liability, id theft etc.) Let’s assume just $15 a month = $180 

Lastly, what is the cost of bad advice? The last two are unquantifiable! 

·         What will it cost you or your family if you currently don’t have all the appropriate insurance coverage’s in place because your advisor can’t or won’t advise you in all risk management areas?

·        If you go to, there are only 7 Certified Financial Planners in Murfreesboro, TN (my home town). There are about 110,000 people in Murfreesboro! That’s 7 people that have been through the proper training to help you with every aspect of your financial life! If you aren’t working with someone that has been properly trained in financial planning, you DON’T get to wonder why you aren’t receiving good advice. You wouldn’t go to a medical doctor who was NOT an M.D.! So don’t trust someone with your money that isn’t a CFP!

Total Cost of Working With a Commission Financial Advisor in our example = $5,275 +
And more than likely the commission advisor is NOT helping you with every area of your financial life. Only your investments and life insurance if you’re LUCKY! 

Cost of Working With a Fee-Only Financial Planner:
Well, this will vary from advisor to advisor, but my fee for someone in our example would only be about $2,000 to help them with everything! Including budgeting, investments, risk management, retirement planning, debt management, and estate planning. And it also would include quarterly meetings to re-evaluate their plan.

And you would get someone who is coaching you in every area of your financial life. Not someone trying to sell you a financial product! It makes NO sense to over pay especially for inadequate advice! 

If you would like a free 2nd opinion of what your current Financial Advisor is doing, give me a call at 615-878-2134 or go to I’ll tell you like it is… which is also the TRUTH, because I hold fiduciary responsibility to my clients. I don’t sell financial products or accept commissions! I only work for my clients!

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