This article is a follow-up to Valuable Lessons From a Bad Financial Planner. Dear Elaine,
As a "Fee-Only" Certified Financial Planner (CFP) and a member of the National Association of Personal Financial Advisors (NAPFA), I found your column on choosing a financial planner right on target.
In recent years, the dazzling performance of most portfolios distracted investors from examining the cost of advice. But the dismal results of 2000 have many wondering if they received fair value, and they now realize how little is known about the price paid for this performance.
Financial advice is paid for in one of several ways. The oldest and most traditional way, accounting for a large portion of advice, is the commission-only method. As the name implies, advisers practicing on this basis are compensated solely by commissions paid by the vendors of financial products, including investment funds, insurance companies and estate attorneys.
Next is a newer and smaller group of providers called fee-only advisers. As the name implies, those providing advice on this basis are compensated exclusively by the fees they agree in advance to accept for the services rendered.
Between these groups is another large group of providers, usually described as fee-based, and characterized by a wide variety of fee arrangements. This approach often involves some combination of commissions and fees. Because so many different permutations are found, fee-based almost defies definition. Perhaps any compensation system not commission-only or fee-only may be described as fee-based.
With few exceptions, those offering financial advice to the public must be Registered Investment Advisors (RIAs). As such, they are regulated by either the Securities and Exchange Commission (SEC) or the state(s) where they practice. RIAs are required to provide the consumer with "Form ADV Part II" before providing advice. This form details, among other things, information describing the basis upon which the adviser is to be compensated. Often, however, the fee information presented in "Form ADV Part II" is confusing, and few consumers are able to figure out how it relates to their own account. As so often is the case, a remedy seems to be an informed consumer who insists upon getting the information in a form that's understandable. I strongly urge that clients require their advisers to provide, in writing on a regular basis, a detailed accounting of exactly what fees they have been charged for the specific services they have received. I also urge clients to insist that their advisers inform them, before making any sale, purchase or switch on their behalf, exactly what fees or charges will result. This should include an indication of what portion of these estimated costs the adviser will receive as compensation.
By requiring this information, the investor should then be able to determine if he or she is receiving fair value, and be assured that all recommendations are being made with his or her interests placed first. -- Paul S. Seibert, Jr., CFP, CRPC, AMA Asset Management Associates, LLC, Sandwich, Mass. Dear Paul, Thanks for providing clarity on this most confusing issue. I heartily agree that those who use a financial adviser should insist that the fee arrangement be put in writing that they can understand. Elaine St. James is the author of Simplify Your Work Life (Hyperion, 2001). Copyright 2001 Elaine St. James, Universal Press Syndicate - - - - - Get no-nonsense advice on the best investment strategies to make your IRA prosper.
