How to Obtain Unbiased, Objective Financial Planning Advice

Bridgewater, NJ (PRWEB) July 27, 2005

The financial industry is awash with conflicts of interest. The plethora of regulations passed by state and federal agencies actually provide little protection for the public. Effective regulations were set forth in the Investment Advisors Act of 1940, requiring that persons and companies covered under the act must always consider their clients' best interests ahead of their own. However, the powerful insurance and brokerage industries have used their political clout to persuade the SEC to exempt them from the 1940 Act. The industry has successfully argued that the public is well aware that they are actually selling financial products, not advice, so any advice they provide is merely incidental to their primary purpose (selling products). Therefore, these self-proclaimed financial advisors should be exempt from the regulations of the Investment Advisors Act. Really?

Even many advisors who are subject to the Act's regulations often do not appear to be acting in their clients' best interests. Many take advantage of the complexity of certain high commission products (primarily limited partnerships and annuity products) by selling them to people for whom the products are ill advised. Many "fee-only" firms which do not accept commissions focus solely on the wealthiest segment of the market, making objective advice difficult to come by for people of average means.

So how can you be sure the advice you are given is based solely on what is best for you? You have two choices: 1) find an advisor you can trust implicitly or 2) separate the advice product from the implementation product. Since number 1) is problematic, unless you have a trusted friend or relative in the business, most consumers may be best served pursuing option 2.

The only way to completely separate product sales from advice is to limit your advisor's compensation to an hourly fee for the advice given. Elimination of product commissions is a good start, but does not go far enough. Many so-called "fee only" advisors argue that they provide objective advice because they accept no product commissions. However, most "fee-only" advisors are compensated primarily by fees based on a percentage of the assets which the client gives them to manage. The advice given by these advisors will natuarllly tend to slant toward investment solutions which the advisor will manage. The advisor will receive no compensation for advising a client to reduce debt, or to buy additional insurance, etc.

Unfortunately, consumers are often reluctant to pay a fee for advice. Perhaps this is because so many people are purporting to offer free advice that many clients have come to expect it. The fact however, is that you will pay for advice regardless of whether you write a check for it or not. If you turn over $100,000 to a "fee-only" advisor to invest for you, you will be paying $1000 - $1500 per year in fees to that advisor (in addition to his planning fees). If you invest $500,000, the advisors bill becomes $5000-$7500. In contrast, if you buy mutual funds from an advisor who is compensated by commissions, you will be paying front end loads or annual 12b1 fees which are deducted from your investments.

An hourly fee only planner will typically provide advice combined with specific instructions enabling you to implement the recommendations on your own. If products are required, the advisor will give you a list of companies to call for commission-free product quotes. For investments, he/she may advise you on specific investments to purchase, together with a discount broker from which to buy them for a minimal cost.

Since your financial situation and market conditions change over time, you should commit to followup visits with your advisor on a periodic basis. (One advantage of fee based planners is that the asset management fees paid entitle you to ongoing advice - hourly planners must charge for each visit). Yes, you will receive a bill from your advisor. And yes, financial planning engagements often require many hours of work, so the bill for complex cases may be substantial. But you can rest assured that the advice you receive is completely unbiased and considers no ones interests but your own. And you most likely can pay the bill in its entirety with the money you save in investment management fees and product commissions.

James D. Kinney

James Kinney is President of Financial Pathways, LLC, a financial planning firm in Bridgewater, NJ.    James has been involved in successful entrepreneurial ventures, and has taught courses in business ethics and marketing at Fairleigh Dickenson and Monmouth Universities. Financial Pathways accepts hourly financial planning engagements, as well as traditional fee based relationships. For more information, visit Jim on the web at http://www.financial-pathway.com.

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