Do you know what you are paying your financial adviser? What about your mutual fund manager? 401(k) administrator? The various shenanigans that took place on Wall Street (and with many a Main Street financial adviser) prompted a desire and demand for transparency in the financial services industry. This sudden attempt by financial services providers to comply and disclose fees has caused many people to question what they are actually paying for…and what they are getting in return.
Let me start off by saying that the figures I’m using are averages; certainly different organizations and individuals charge much less and much more than what I’m detailing. Let me also say that I am not opposed to any business model; everyone needs to make a living. I just prefer it when people know what they are paying.
And I am unable to tell you what you would actually “pay” for any kind of insurance; it is all over the board. There is a new disclosure bill in the insurance industry -I’m not sure what stage it’s in- requiring insurance agents to disclose their commission. I have to say I’m not terribly in favor of this particular bill because I don’t know if it’s necessarily beneficial to the consumer. Insurance commissions can vary widely based on company, product and policy riders. Sure, I think there are times when agents may be swayed by larger commissions that could be obtained by selling certain products, but I think the whole commission disclosure adds yet another layer to the already complicated process of obtaining insurance of any kind. But I digress…
Let’s take a fictitious couple who have $250,000 of net worth (aside from their home’s equity of $50,000), $100,000 of income, and need a comprehensive (big picture – are we doing the right things?) financial plan.
Adviser A offers a free financial plan. The plan determines that the couple needs life insurance, disability insurance, long term care insurance, and that a variable annuity would be suitable for their $250,000 of investable assets. There is no charge for purchasing the variable annuity, but there are annual fees of 1.25% for the guaranteed death benefit feature and another 1.25% for the management of the investments: $6250 every year. The couple learns that they must keep their money with the variable annuity for seven years or risk losing up to 7% ($17,500) via an early withdrawal penalty. There is no ongoing contact to review the couple’s progress.
Adviser B offers a financial plan based on 1% their income, so $1000.000. She determines the client needs $1 million in life insurance and uses A share mutual funds for their investments portfolio. The client pays $14,375 one time to get into the mutual funds (assuming no break points have been applied) and an ongoing management fee to the mutual fund manager of 1% or $2500.00. Their portfolio is reviewed annually free of charge.
Adviser C offers to provide a financial plan based on 1% net worth: $2500.00. He also manages investments for 1.50% per year. The financial plan provides an asset allocation and retirement projection. The client chooses to invest with Adviser B and pays him the financial planning fee, plus $3800.00 annually for investment management. Semi-annual reviews are included in the management fee.
Adviser D offers a financial plan based on the scope (how many areas are being analyzed) of the engagement. The fee is $5000.00 one-time, with annual reviews at the adviser’s hourly rate of $200. Adviser D doesn’t offer any financial products or services; the advice is objective. The plan:
1. Reviews the couple’s cash flow. The couple finds out where all of their money is going and how to channel it towards their goals.
2. Analyzes their income taxes and determines that if they increased their 401(k) contributions that they’d reduce their adjusted gross income and would qualify for a tax credit.
3. Identifies that they needed to increase their life insurance coverage but could do so using a combination of employee benefits and private insurance.
4. Identifies that they were both eligible for company-provided disability insurance coverage but were not participating in it, but they should procure private coverage in the event of job loss and disability.
5. The couple’s risk tolerance, values, goals and time horizon’s were discussed to create an asset allocation for their soon-to-be used 401(k) funds as well as the assets they had to invest. Referrals to qualified Registered Investment Advisers were provided, but the couple choose to use mutual funds they researched themselves. The management fee is about .50% ($1250) per year. The adviser offers to monitor the investments along with them for .50% ($1250) per year.
6. The couple needs to increase their retirement savings; ways to do this are detailed in the cash flow analysis. They also must plan to work until 67 and delay taking Social Security until that age in order to increase the probability that they can maintain their desired lifestyle.
7. The couple is alerted that both have their Mothers as beneficiaries on the employer sponsored life insurance. Referrals to qualified attorneys are provided so the client may create wills, powers of attorney and health care proxies along with suggestions for beneficiary designations.
Certainly seeking the advice of a CERTIFIED FINANCIAL PLANNER TM is an investment of money, time and energy. But as Benjamin Franklin said “An investment in knowledge pays the best interest.”