Money Monday: Talk is Not Cheap. What to know before you find a financial advisor.

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Last week I suggested that in 2024 you may need to seek advice from others more knowledgeable that you are on the subject. I then shared a few of the financial advisors available and their qualifications. But before you run off shopping for a professional, there are at least two things I find curious and noteworthy.

The world of  financial advisors may not be all that it is cracked up to be. A  2022 Northwestern Mutual Survey revealed that 35% of Americans use a financial adviser. Which really means that most of us manage our money on our own.  Even more revealing is that over the last 30 years, the typical investor underperformed the Standard and Poors 500 Index (S&P500) by almost 3% points. While you can do it on your own, I maintain the idea that you need to talk with someone knowledgeable about finance as you navigate and steward resources in 2024.

Surely, if you have a medical problem you seek advice from your primary physician; or if you have a legal problem you seek advice from your attorney. So why then when you are having financial challenges or working on your plan, you only seek advice from your “cousin Vinny”? That said, talk is not not cheap and getting financial advice could be costly, but here’s what you need to know as you launch out.

Flat Fees

Paying a financial adviser a flat fee means that you could pay a flat amount for a specific service, say like budgeting or creating a financial plan. You could also pay by the hour for services. There may be a retainer for the flat fee service along with a monthly payment arrangement or annual payment depending on how the flat fee payment is  structured. If what I just told you sounds great! Forget it! Because you will also need to distinguish between a “fee-based advisor and a fee only advisor”.

A fee-based financial adviser will charge you for their advice and earn a commission on any products they sell you. On the other hand a fee only advisor will only charge you for advice. The critical point is that a fee-only advisor, is a fiduciary,  and there is no conflict with  his or her services. That person will put your interest above theirs as a legal, contractual, or ethical requirement. The other good news about a flat fee arrangement is that you can receive services whether you have money or not. Meaning, you don’t need to have a large portfolio in order to qualify for services.

Asset Under Management (AUM)

This method of charging for services is probably the oldest system and very popular. If you are being charged for financial advice under the AUM system, it means that your adviser will charge a percentage of your portfolio’s total value each year. Generally, your advisor earns more as you portfolio grows and therefore they are incentivised to work hard on your behalf. While the average advisor may charge 1.12% on your portfolio, this option is not available to everyone and fees are charged whether your portfolio increases or decreases.  An AUM advisor will typically  require you to have a portfolio of $250,000.00 or $1,000.000.00.

Commissions

A financial advisor who works on a commission basis may provide information without cost. However their income depends on the products they sell to you. You must always keep in mind that individuals who sell insurance, stocks or bonds may not be fiduciaries and therefore they may put their interest above yours. That can be problematic if you are relying on their advice to choose products or investments.  This comes into play when insurance premiums are based on commission, for example. Since a Whole Life or Variable policy premium is higher than that of a Term Life insurance policy, an adviser who is not a fiduciary, may recommend a policy to you because they will receive a greater commission even if such policy is against your interest.

Robo Adviser

When it comes to fees for a financial adviser a Robo Adviser may turn out to be the cheapest. Many younger investors are using robo-advisers or a hybrid combination of robo and human advisers to manage their finances. The fees related to a robo adviser may be 75% less than that of a human advisor. The downside is that you lack human interaction if you choose a strict robo-advisor instead of some hybrid option.

As a general matter if you are working through finding an advisor and reasonable fees, know that advisor fees will vary based upon the area or state in which you live. You can find an advisor by going to www.cfp.net,  the Financial Planning Association at  www. Plannersearch.org or NAPFA at www.napfa.org

That’s WHAT’S UP!

Today’s What’s Up is about Junk Fees. The federal government proposed and passed laws to reduce or  eliminate banks and others from charging customers and consumers junk fees. An example of this would be insufficient funds and surcharges on bank accounts or utility bills. Beware, however, banks and others have now devised another scheme for making that money from consumers. Banks are now proposing to charge junk fees when there is insufficient funds on your debit card,  or get this, when your credit card transaction is declined in real time as you swipe. Fortunately, the Consumer Financial Protection Bureau is  being proactive and proposing a law to deny banks from charging those proposed junk fees. And that’s what’s up!

Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2024. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.d

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