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Why select a "Fee-only" advisor?
Because fee-only advisors work solely for their clients and are compensated only by a previously agreed upon fee. Therefore, they can be completely objective in their evaluation and can recommend a course of action based only on strategic financial considerations. Fee-only advisors do not accept commissions or receive any other compensation. The result is an unbiased overview by professionals who are working solely for their clients.
The National Association of Personal Financial Advisors (NAPFA) is the largest organization of fee-only planners. Fee-only planners believe that a significant conflict of interest exists if a n advisor stnds to personally gain financially from the purchase of any product he or she recommends to the client.
NAPFA has been endorsed by the AARP, the Consumer Federation of America and many state regulators.
The Case Against Commissions
Commissioned sales have been good to Wall Street. It's a great way to distribute products. Investors, on the other hand, are often poorly served. The brokerage system is inadequately policed and rife with built in and undisclosed conflicts of interest between broker and customer. Whenever you find inadequate disclosure coupled with conflicts of interest, you can rest assured that a fair number of people are going to be victimized. Hardly a day goes by without disclosure of another violation of trust. Unable and unwilling to repair an extremely profitable system, Wall Street responds with slick Public Relations and Advertising. Investors are fed up, and looking for alternatives.
The common thread that runs through these abuses is the commission-based system of compensation. Commissions create the conflicts of interests between the broker and client. Commissions are the mechanism which allow the house to manipulate the broker. With the right commissions, incentives and bonuses Wall Street can get their brokers to sell anything!
Business Week's February 20, 1995 cover story, "Can You Trust Your Broker?", lists an entire catalogue of investor abuses. Proclaiming on the cover that, "Too many brokers are working in their own interests, not yours." Business Week leads into the story with, "Questionable sales tactics fueled by lavish incentives are prompting a rising tide of criticism." Here's how Business Week sums it up:
The Case Against the Brokerage Industry
Business WeekFebruary 20, 1995
PRESSURE:The compensation system at brokerage firms creates intense pressure on brokers to generate a high volume of commissions.
INCENTIVES:Brokers are given extra incentives, such as Rolex watches and all-expense-paid vacations, to sell special high-profit-margin products with little regard to their suitability for customers.
BAD ADVICE:Firms push brokers to recommend in-house mutual funds, where the firm earns management fees, instead of funds run by outside managers. Most in-house funds have mediocre performance records.
BONUSES:Many firms recruit top "producers" from other firms with huge up-front bonuses and extra-high commissions. That gives the producers an added incentive to promote excess trading.
POOR INFORMATION:Firms don't provide customers information on the overall return on their investments and aggregate commissions they've been charged.
Wrap Fees – A Public Relations Band Aid
As investors began to resist the traditional "churn and burn" brokerage tactics,Wall Street responded with The Wrap Fee Account. Viola! Suddenly, we have a public relations miracle. The commission-crazed broker has magically turned into the impartial professional. A new title of "Financial Consultant" completes the mystical transformation!
At first glance Wrap Fees appear to correct many of the most glaring abuses.But a closer look exposes just another new set of proprietary products with even higher fees, poorer performance and higher profit margins than proprietary mutual funds. The conflicts of interest aren't gone, just better hidden. Clients are allowed a limited choice among in house managers.
Each manager is expected to trade through only the introducing brokerage house.Hidden profits on trades in bonds or stocks where the house makes a market remain with the brokerage house. Many observers have opined that these undisclosed gains from trading are high enough that the brokerage houses could very profitably offer the Wrap Fee accounts for no charge.
The Fee-Only Solution!
Investors need not submit to the tender mercies of Wall Street's barons.There is an alternative. Investors in record numbers are turning to the alternative that corrects the commission based abuses by eliminating the commissions!
Retirement Advisors, Inc. is a Fee-Only independent Registered Investment Advisor.Here's how our Fee-Only compensation system stacks up against Business Week's, "Case against the brokerage industry":
How Does Fee-Only Compare?
In each case the situation is reversed.A stockbroker has every incentive to maximize commissions and costs. I have no pressure to generate high volume of commissions. As a fee-only advisor, I have strong incentives to minimize your costs and maximize your account value. My fees can only grow if the size of your account grows.
I have no INCENTIVES to sell high profit margin products, or give BAD ADVICE to sell in house mutual funds. Rather than receive BONUSES for production, discount brokerages and trust companies compete for my business based on a combination of services and lowest possible cost.
Neither do my clients get POOR INFORMATION on performance and commissions. I provide each client quarterly reports which detail performance of the account as a whole and each holding. Each client receives an invoice for each fee. All fees, expenses and transaction charges are fully disclosed and clearly accounted for.
My minimum account size is $300,000.
I require a minimum account size to effectively and economically diversify our clients using institutional funds. I feel that I would not add sufficient value to accounts below my minimum to justify my fee. I employ a tiered fee schedule with progressive discounts depending on account balances.
The Right Choice
Investors have clear choices: Business-as-usual on Wall Street or Fee-Only compensation with an Independent Registered Investment Advisor. Given the obvious advantages, it's no wonder that sophisticated investors are insisting on full disclosure, advice free of conflicts of interest, and exclusively in their best interest. Investors are discovering that how you pay for advice may be as important as how much you pay. Fortunately, at Retirement Planning Advisors, Fee-Only advice turns out to be extraordinarily economical, too. Can you afford any less?
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