I went to dinner with a physician colleague and the conversation turned to financial planning. He had attended a party at an expensive restaurant that celebrated the success of a financial services firm. He isn’t a client, but is seriously considering it. In the past, he had wondered if his advisors really had his interests as their top priority. Sometimes he feels that they are selling him a stock or insurance plan that benefits them more than him. How can you tell? He isn’t interested enough to want to spend time and dig into the details of risk, growth, fee structure etc. I’m not blaming him at all: He has a busy practice, a wife, three kids, a dog, and other amusements (fantasy football is a lot more interesting than 401K fee schedules!).
At the dinner party, they pointed out that their firm isn’t like that. They charge a percentage of your assets. That way their interests are aligned with your interests. They want your wealth to grow and that helps them make more money. They can also handle the complexity that is involved when assets grow large. Poof. Conflict of interest is eliminated in this win-win arrangement. Do you agree? As you might have detected from my tongue and cheek comments, I’m still skeptical.
I saw a couple of conflicts when giving financial advice to an elderly woman recently. I advised her to pay off her house and to put a large chunk of her retirement funds into a SPIA (annuity). Both increase her monthly cash flow (critically needed) and lower her risk (a big concern for her). Her financial advisor recommended against these moves. When I talked to him, he couldn’t come up with reasons that I thought were valid or reasonable. I suspect a large underlying issue was that he would lose substantial fees since the assets under management would be reduced markedly. That is clearly a conflict of interest.
Other potential scenarios for conflict of interest: manager recommending an active 401K that he manages rather than the low-cost index fund option at the client’s current employer, advising not to give large charitable donations, advising against real estate purchases (investment or a larger home). Some offer “comprehensive planning” but give short shrift to anything that doesn’t increase investable assets – even if they are vitally important, like liability matching, debt management, insurance needs, asset protections, estate planning, etc.
Also, some advisors charge a higher percentage for managing the equity portion of investing. Because of this incentive, clients can end up taking on excessive risk with an asset allocations too stock heavy.
Lastly, it makes more sense to me to pay a knowledgeable person for an hour our two of their time once a year. In the past, I have gotten wonderful advice for $500 - $800. 1.5% fee may sound small as a percentage. That is why they quote it as a percentage and not the actual dollar amount. Let’s say I’m a middle-aged physician with 3M in investable assets. Is there any advice they could give that is worth 45K? I doubt it, but that is what the 1.5% fee would amount to. Outrageous! Are you paying fees? If so, do you know how much? Are you really getting your money’s worth?