Financial advisors: fee-only or fee-based?

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.


College Financial Planning—what’s the right age to start?

Right after you plop on the little hat and wrap him or her in the blanket like a burrito! Right. I’m sure there are people who begin planning at birth. Those people are called grandparents. I even heard of one single person who started a 529 plan for her future children, which were still just the proverbial gleam in her eye (not such a bad idea as the 529 fund could be used for her own further education).

Bottom line, earlier is better but it’s never too late. As we all know, the longer that funds are invested, the more time they have to grow. The longer the time horizon, the more potential there is to invest in stocks and other equities, which historically have a better return (but only over long periods). A few thousand dollars invested during a child’s early years can grow to a pretty impressive sum by college. For example, only $2,000 invested once and held for 18 years, 8% return, could grow to nearly $8,000 by the time the child goes to college. Now, $8,000 isn’t going to pay tuition at Stanford, but my guess is you wouldn’t turn it down, either. Same interest, same payment, but do it every year for 18 years and you’d potentially have nearly $75,000. At today’s prices, that’s a pretty nice sum to have socked away.

Really, if you think your child might be headed to an elite private school (and who doesn’t look at their infant and think he or she is a genius?), you’ll probably need more than $2,000 per year. But, some people get so intimidated by the vast price tags currently hanging off of diplomas that they never start at all. Saving something, even a little, but starting early and doing it consistently is almost always the best policy, whether for college, retirement, or any future goal. One caveat: pay attention to fees. There are plenty of “college planners” who work on commission and will sell you all kinds of wonder-investments for a heavy commission. It’ll be wrapped into the investment so you’ll never know what hit you. Even in 529 plans, some plans charge WAAYYYY more fees than others, and this can really eat your returns.

Okay, you haven’t done it and now your kid is in high school. It’s true you don’t have all that much time to save, but it’s still worth a run. You’re probably making more now than you were when Junior was an infant, and you have a better idea of whether you might qualify for financial aid. Now’s the time to take a look at how your investments and assets are distributed, and whether there’s the potential to shift some of them to qualify you for aid (if eligible or borderline) or explore tax strategies to produce a “tax scholarship” if it’s clear you won’t be eligible. Also, Roth and traditional IRAs (for you or the child) might be considered as another potential source of investing for college. Don’t forget Roths need to be invested for 5 years before tax free withdrawals on the gains, and might be reserved for later years of college or grad school.

Try not to wait until junior year—that’s the “look-back” year and you’re going to have to scramble if you want to use asset-moving or tax strategies. Whatever your picture is when you file the FAFSA (the day of) is what will be assessed for financial aid. It’s not too late for some strategies, but you’re going to need to get a move on.

If you’re the ultimate procrastinator and have waited until AFTER the financial aid awards were announced ‘round about May, well, there’s always next year. Next year, with a better plan. Maybe it’s time to call your friendly financial planner? I look forward to working with you…

College financial aid planning—maybe you don’t need us!

Do you do your own taxes? Yes? Then you have pretty good records and can lay your hands on all your financial information. You’ve got plenty of experience in working through financial forms. So, you probably can complete college financial aid applications on your own. The Free Application for Federal Student Aid (10 pages) is available at, and there’s a ton of information, FAQs, and brochures available on the site to help you. In fact, they have a special warning on the site not to allow yourself to be fleeced by unscrupulous “financial advisors”. Similarly, if your student’s college uses the CSS/Profile, it’s available online at If you can make it through the FAFSA, you can probably do the Profile, too.

Every year I, too, think about doing my own taxes. Cheapskate that I am, I think about what else I could be doing with several hundred dollars (okay, it’s waving at 4 figures now). But then the questions start to come up—how should I treat this? Should this be on Schedule A or could I put it on Schedule C? Most important, did I miss anything that could have saved me money? And all those changes from last year…Pretty soon, even though I’m pretty savvy about this stuff and my bookkeeping and records are well organized, I conclude that I do need an accountant who will do, expertly, accurately, and in a short time what will take me a long weekend to do ineptly and inaccurately.

I never want an accountant who cheats or does anything that might come under the heading of funny business. Thankfully, I’ve never had an audit and I don’t expect to have one, but if I ever do, I plan to go into it confident that everything I did was on the up and up. However, I do want my accountant to take me up to the legal limit—to get me every break I’m entitled to. That’s my philosophy on college financial aid, too.

Good college financial planning takes you up to the legal limit. (And it is a LEGAL limit—the feds can prosecute you for fraud on the FAFSA just as they can on your income taxes.) There is nothing illegal about restructuring your assets, paying off debt, or running your business in such a way as to maximize your eligibility or take advantage of legal tax strategies. Of course we should pay our fair share, but I don’t think we are obligated to subsidize others by our ignorance.

So, go ahead and take a crack at the FAFSA. It’ll get you started and you’ll have a lot better idea of what questions to ask. You know where to find us.