My financial planning practice does not charge for assets under management (AUM) but the majority of planners do. Though there are conflicts-of-interest with all forms of compensation, let's look at advisors that manage your money and charge a fee to do so.
Does your advisor "disclose all conflicts of interest"? Disclosure is key.
Here are a few examples:
(1) Should you keep your money at your 401k with your employer?
If yes, the AUM advisor then cannot (should not) charge for those assets; unless you rollover those 401k dollars to an IRA the advisor can manage. If you are between the ages of 55 (the age you can remove money from a 401k without the 10% penalty) and age 59 and 1/2, then you have lost the opportunity to access those funds penalty free if you roll them over.
(2) Should you borrow from your home equity or use some of your investable assets to make a substantial purchase (car, second home, etc.)?
Going into debt safeguards your investable assets under management and does not lower the fees being charged by your advisor. Many reasons may be given for why debt is the better option but is there not a conflict of interest?
(3) Should you invest in a 529 college plan or invest by segregating your own funds?
Again, the money removed from your portfolio and managed by a state's 529 plan is no longer under the fee structure of the planner charging AUM (or should not be). This does not mean that investing through a ROTH IRA may not be a better solution than a 529 and provide you with more flexibility but, again, might there be a conflict of interest?
(4) Most egregious in my opinion is when planners manage your assets, charge a flat fee for all of them, yet suggest that some be held in cash or laddered CD's and/or fixed income that earn less than the fee charged by the advisor. Are you paying the same rate regardless of the asset type?
You can invest in CD's on your own. An advisor has little room to add value to the fixed income portion of your portfolio that may average 5%. If he charges 1%, for example, then that is 20% of what you make. That is excessive, don't you think?
The problem, of-course, is that planners know that asset allocation is where the volatility of returns can be managed. Therefore, if you only have the planner manage your stock investments then they have no effective way to allocate funds, manage risk and, therefore, manage the amount of fees they receive if (actually, when) the stock market goes down again.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.