A penny for your for financial advice.
Posted on July 24th, 2008 – 4:49 PMBy Kara McGuire
I had lunch with a group of financial advisers today who want to figure out if there’s a way to profitably serve clients with lower incomes or investment account balances. They typically work with clients who have hundreds of thousands to invest.
The conversation kept returning to two questions: How much are advisers willing to earn to work with the less than affluent? and How much are we willing to pay for that relationship?
Some people pay $100+ for cable and internet $40+ to work out each month. You’d think a relationship with a fee-based financial planner who picks your investment mix, helps you with your will, gives you tips on mortgages and balances your budget would be worth at least that, right?
How much would you pay to have a qualified financial planner at the ready? $150 an hour? 1 percent of your salary? “Free” advice thrown in from your stock-picker? $0 because you can do just as well on your own?
And if you have an adviser, how much do you pay and is it worth every penny?
15 Responses to "A penny for your for financial advice."
I do my own, but I’ve spent $100-150 on books over several years. We did visit a financial planner, free through my wife’s 401k, who didn’t add much.
I certainly wouldn’t expect one to work for free, but for their sake and mine, I would hope they would offer a smaller fee for smaller portfolios. Someone taking the time and money to seek advice early on is more likely to successfully grow small investments into larger ones, creating additional opportunities for financial planners willing to build relationships with these potential clients. That’s my thought.
pfffbbbt on financial planners. We’ve visited a couple. Since we are young(ish), we only have about $50k stashed so far (but definitely growing).
Each time we talked it over with the planner on an initial visit, they affirmed our choices, then we were done. No follow-up, no inkling of interest. Too bad for them. I think it is because we have ‘too little’. We are saving 15% of our take home every year, and once the stock market turns, we’ll be in the 6 figures fairly quickly.
I am doing well enough without them. I understand beta, can use that to figure out risk, and when all else fails, I can throw it into a market index fund.
If planners had some skin in the game I think it would work better for all. As it’s currently set up you either pay a % of assets under mgmt or an hourly fee neither of which has any risk for the planner. How about establishing risk adjusted benchmarks for investment returns and long term agreements (5-10 year, more?) and then compensate the planner based on the return above the benchmark target over the course of many years. In years you do worse than the benchmark that comes out of the planner’s future or past fees, do much better and s/he is paid more.
I’d love to talk to a certified financial planner, if only to get a sense of whether or not I’m on a good track. (Talking to the benefits person for my 457 plan at work has limited utility — we only talk about my 457 plan, really.) The challenge isn’t even the money. I am willing to pay a fee to get good advice. The barrier is the homework I need to do to find someone who is certified, good at it, and willing to take on someone with my level of income and savings. Given my schedule, it’s easier to read free/cheap advice and make my own decisions than it is to research, call, meet with and deliberate about a number of options. It would help if i had freinds in my bracket who could recommend someone…but I don’t. My contemporaries aren’t saving and planning so much, or they’re facing the same barriers I am.
Also, I am not so great at typing.
Seems like readers have saving confused with investing. Or missed the emphasis on people who need advice but have lower incomes or investment account balances.
Admittedly, having an advisor actively manage your investment portfolio can fare no better than leaving it to your own devices.
But that’s not what the issue is!
Clients with lower incomes or investment account balances don’t just need advice about investing which helps them reach their long-term goals… they probably require advice about how to get their short-term goals (hence “saving”) in order first.
These are the clients who don’t have enough left over every month to even think about investing. These are the clients who are potentially financially illiterate.
When I first graduated college, I paid an advisor $600 for a year-long relationship. Back then, all I knew was that I didn’t have enough of anything and that I better do something with my new $45,000 job.
Looking back, I thought it was worth every penny. I myself couldn’t stomach the challenge of having to work so much with someone who has so little.
Back then, my advisor told me she was interested in having me as a client because I’d only grow, and c’mon… advisors can benefit by cultivating life-long relationships.
Since I make much more now, and have much more “saved” for the short-term and “invested” for the long-term, (she’s not charging an annual fee anymore but a % of assets)… I think it’s safe to say there’s some promise in growing the lower income client segment, esp. when they’re young.
The problem is convincing the young, fabulous, and broke (and advisors) that there’s a value preposition somewhere in there.
Betsy, I have that same hurdle. My credit union is affiliated with a fee-based CFP, but I haven’t gotten around to making an appointment.
I think they are asking the wrong questions. Instead of “how much can we charge” they should be asking “what value can we offer to people with smaller portfolios.” If they determine that they can offer a roughly 10% increase in value through knowledge of ivnestments, taxes, and such then they will have no problem finding clients willing to pay 1% of their total for that. If on the other hand they cannot determine any quantifiable benefit, then they are going to have a very tough time selling their services for any price.
I hear a lot of talk about relationships and how it would be great to work with someone who really knows you and your situation, but if that was the case I’d just hire a friend. What is the value adding economic incentive to pay for someone if they themselves don’t know the answer?
After 25 years of doing it ourselves, we are in the process of trying to find a fee-only planner to work with us on retirement scenarios (i.e. can we retire early, and if so, when). These planners charge $150-200 per hour after the initial free consultation, but we haven’t moved beyond that step yet. We’re hoping to find a planner that we feel more comfortable with before we start paying.
It’s definitely a catch-22. Not a lot of incentive for financial planners to work with “small asset” households, and then again, those households have a lot less at risk. And if they’re like me, they’ve found that reading the “free” advice (WSJ Sunday for me - small cost) and paying attention works really well. Just making a PLAN works well!
But at some point I imagine wanting an advisor to look at the whole picture and I’ll be looking for a fee-based advisor because I’m not about to roll over the huge chunk in my 457 plan into an IRA with Ameriprise or someplace like that. And I doubt my Roths with Vanguard are going to get to the minimums needed for fullblown advisor help from them (their regular help is great, though!).
I think the issue is with the hourly number. Even if it’s cheap compared to a doctor or a dentis, $100 an hour plus just seems awfully high. Kara’s comparison services are really apples-to-oranges. $100 a month for cable (which I don’t have, but once did) seems reasonable if you love tv. Because that means you’re probably watching at least 2 hours a day, which = 60 hours a month, < $2 an hour. Regardless of whether or not you think that’s actually providing you any value, the pure numbers are just easier to swallow for most folks.
Me, I’m sticking with “free” TV and “free” advice for as long as it works. At some point I’ll need that fee-based planner, but when I do, how do I find one? I think the REAL question here is “How can average joe find someone they TRUST?”
I agree most of the comments are confusing the terms “investing” and “financial planning.” Buying an index fund is not financial planning and if your advisor only gives investment advice, you are not working with a financial planner. The investment product is only a tool to help implement your financial plan and yet the debate almost always centers on which products are used instead of the goals you are personally trying to accomplish. The reason the hourly fees seem excessive is because you are not paying for the time, you are paying for the knowledge. A good advisor does not spend 100% of their time meeting with clients - they are spending significant time improving their knowledge level and sharpening their skills. I have visited with thousands of advisors over the years and I have never met one that focuses on the low/middle income market - not one. If an advisor works with low net worth clients, they are probably trying to survive until they can accumulate a higher net worth client base and then lower net worth clients tend to get ignored. A big trend in the industry right now is teaching advisors how to fire their “less profitable” clients and focus on their top revenue generating clients. This is part of the reason why so many lower net worth people have bad experiences with advisors. This may not be surprising considering the financial services industry is almost entirely focused on advisors working with high net worth clients. Our firm’s focus is on helping everyone that wants financial planning help, but the only reason we can afford to do what we do is we have corporate financial advisory agreements that compensate us directly from the employer. Otherwise it would not work. I routinely get employers thinking they offer what we do for people because they have an 800 number or a proprietary service person associated with their plan. Again this is not financial planning. Your proprietary 401k service person cannot give advice. They can give some generic information that might be great, but they cannot give advice and they are not financial planners. I am truly not trying to be self-serving, but if you would like to learn more about the process of financial planning, you can access a free electronic version of my book “Financial Success for the Rest of Us: Reality Based Financial Planning for Mainstream America” at our website http://www.dorvalchorne.com. I had an entire chapter dedicated to how financial advisors get compensated and was forced to remove the chapter during the compliance review!
I also diagnose my own illnesses, do my own dental work, do my own architectural work, and do my own business taxes.
A few good books such as “your money or your life” would probably work as well as a CFP consultation.
A couple of people have hit the nail on the head here. It was in our firm that this conversation with Kara first came up. The question of “how much can we charge” isn’t the relative question, but the question of “what are you willing to pay” is! This is more of a question on demand than anything else. For those of you who handle your “investments” yourself, I think you are missing the point. As a Certified Financial Planner TM practitioner, the investment management for clients is only about 10% of the deal. We recognize that financial planning can be quite valuable to people in ALL phases of their personal and financial lives. We get negative feedback all the time about how we don’t serve the “underserved” demographics that exist. The reality is that we would like to work with these people, but have to find the correct structure in which to do so. Are you willing to pay an annual retainer to have a planner at your beck and call? Do you prefer an AUM fee? How can you help planners find a symbiotic way to add value to your lives without sacrificing their way of life in the process?
