What’s the difference? About as much as pro-life vs. pro-choice. Yes, I have to think twice before I have those two straight, too. But on the fee-whatever, it makes a big difference in the kind of advice you’re likely to get.
If you’re old enough to remember the old comedy routine whose tag-line was, “That’s what they’d like you to believe,” you’ll understand why suddenly you see all the brokerage houses touting fee-based. It sounds more consumer friendly, like your broker
is really going to care about you, and is really a financial advisor, not a big, hairy, commission-hungry salesperson. Please bear in mind that, as of now, a stockbroker (or whatever else they call themselves now) is only obligated to recommend products or investments to you that are appropriate. Funny how appropriate also seems to mean the ones with the best commissions in any given genre, or the ones designed and marketed by their firm. The brokerage industry has fought tooth and nail to avoid being held to a fiduciary duty, which means an obligation to put the client’s interests first—to
recommend investments in the best interest of the client.
Fee-based is often a way to make the client believe they are paying less commissions for the trades they make. It’s also been a way for brokerages to sell clients a ton of different investments while basically ignoring any service. And you can be pretty certain that everything recommended in the account is going to be a product of the brokerage firm. Just compare the mutual funds management fees to one from, say, Vanguard. For a more extensive discussion, here’s a good article from Investopedia.
Guess what I’m going to recommend? Fee-only, of course. That’s what Haven is, and that’s what I think is ethical. With fee-only, you know exactly what you’re paying for. Currently, Haven charges only by the hour for financial planning advice. Fee-only set-ups don’t accept commissions, or referral fees, or lavish junkets (I wish). My recommendations are only based on helping you consider your needs and coming up with suggestions that are in your best interests.
At the moment, Haven does not manage money or your investments. However, some fee-only financial advisors do, and we may add this service in the future. Generally, this works by charging a percentage of your assets—if they go up, the amount increases (not the percentage) or down, and down goes the amount. Of course, a consumer needs to be careful of how high a percentage a fee-only planner is charging, and generally these arrangements are only cost effectivem(for both advisor and client) if the “Assets Under Management” exceed $500,000. Think about it—if the advisor is charging you .05%, you’re paying $2,500 per year. For accounts that “small”, many advisors will charge 1%. Ironic that the more money you have, the lower percentage you’ll be charged.
$2,500 would buy a lot of hours of time with an hourly planner. For under a million, you probably don’t need that much time if your investments are in well-thought out baskets. Maybe the first year, but probably not every year. However, if you’re way too busy, or nervous, and you expect to have ongoing needs for re-evaluation or advice, placing assets with an advisor who uses a custodian can be appealing. Fee-only investment advisors like “AUM” because, frankly, we get frustrated when we make great recommendations and the client never implements them. If you cringe at re-balancing, the advisor won’t be as likely to fall in love with your investments as you may be.
One other reason to use fee-only advice: a comprehensive look at everything that makes up your financial security. People will often say their advisor has done well for them if their account “goes up”, which may be due far more to the vagaries of the market than any expertise on a broker’s part. But a fee-only financial planner can take a comprehensive look at your planning for retirement, estate, college & family goals, insurance, tax, and spending management, without attempting to sell you products on any of them. For example, when have you heard a broker recommend a Coverdell? Why not? Too small potatoes. 529s make a lot more money for them.
So, how to keep them straight? My advice—ONLY fee ONLY.