Friday, January 22, 2016

The Frugal Planner's Weekly Dispatch, Volume 2, Issue 4

From: Chuck Donalies, CFP® On Behalf Of Chuck Donalies, CFP®
Sent: Friday, January 22, 2016 9:00 AM
Subject: The Frugal Planner's Weekly Dispatch, Volume 2, Issue 4

The Frugal Planner's Weekly Dispatch
Personal Finance, News, Ideas, and Things I Find Interesting

Volume 2, Issue 4
January 22, 2016

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Let's Talk About Fees

Every superhero has an origin story. Batman's parents were murdered in front of him, Spiderman was bitten by a radioactive spider, Bruce Banner (AKA The Hulk) was caught in a blast of gamma radiation, and the Frugal Planner was exposed to high financial planning fees.

My introduction to the financial services industry came when I was in my early 20s. I met with a planner from Ameriprise Financial to discuss opening a Roth IRA and asked how she was being compensated. Her response was frustratingly vague, ensuring me that it was built in. At the time, I didn't push further and opened an account. It wasn't until I received my statement that I learned a sales charge of 5.75% was "built in" and my $2,500 was actually an investment of $2,356.25 with a sales charge of $143.75. A high fee and no transparency, needless to say, I wasn't happy with this arrangement.

Percentage of Assets Under Management
Fast-forward nine years and I was working as a planner for a boutique investment management firm. I chose to work for this firm because they didn't charge commissions, rather a percentage of assets under management (1% on a sliding scale). For example, if you came to the firm with $1,000,000 they would charge you $10,000 per year. That fee is easy to calculate and easy to understand.

Over time, this arrangement started to bother me. I began to question how much value we were adding to our clients portfolios. We weren't providing true financial planning, just asset management.

Here's a good example: A client with over $8 million in assets was charged $50,000 to $60,000 per year. I believe we were adding value by managing the client's portfolio, but not $50,000 to $60,000 worth of value. There just wasn't that much work to be done once the portfolio had been built. Who was being helped the most under this arrangement, the client or the financial advisor?

Reasonable Fees
So how does a financial advisor determine what is a reasonable fee for financial planning and asset management? I asked myself this question many, many times prior to launching my firm. I came to the conclusion that the best way to determine a planning fee is by estimating how much time I'll have to spend working with a client on an annual basis.

It can be difficult to calculate a proper fee using this method. I know I didn't charge enough when I first launched my firm. In addition, it's possible some prospective clients might think my services are more costly or inferior because my firm's fees are (1) transparent (i.e. no hidden commissions) and (2) less than the traditional percentage-of-assets model (too good to be true?).

In the coming years, I believe it will be difficult for financial planners to charge commissions or high fees based on a percentage of assets under management. Consumers are increasingly savvy when it comes to paying for financial planning advice.

The Bottom Line
If you're searching for a financial planner, ask how they're compensated. Are they receiving commissions for selling you financial products such as mutual funds or annuities? Also, find out if the planner provides true financial planning advice or just asset management.

Remember, The Frugal Planner is out there fighting the forces of evil! And by evil, I mean outrageously high fees and planners that are really salespeople in disguise.

The Frugal Planner!

Snowpocalypse, Part Deux
In the DC region this weekend? If so, I hope you have more snacks than the Oregon militia. Stay warm and have fun!

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