Three Steps To Making Your Financial Planner Honest - Forbes

Don’t pay $27,000 a year for cookie-cutter portfolio advice.

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Think of all the lobbying and litigating over whether a stockbroker is a fiduciary. Think of the proclamations by “fee-only” financial planners that their compensation makes them act in your best interest. Consider the time spent by crusading journalists hunting down criminal planners (yikes! child molesters!) and writing breathless articles.

All beside the point.

Two things matter when you search for an advisor. What are you paying? What expertise are you buying?

I have a three-step plan for focusing your attention on what matters. Rule #1 has to do with Madoff-proofing your money. Rules #2 and #3 deal with payment and expertise.

#1. Park assets at a big place.

The custodian of your securities should be a company with $1 trilllion. B of A, Fidelity, JP Morgan Chase, Schwab and Vanguard are all fine choices.

What about an institution with only $500 billion? Well, maybe. Joe’s Planning of South Succotash, Indiana? Absolutely not.

Custody and advice are separate. Your financial planning can come (probably will come) from a small outfit, and you will pay for that. The custody should be free. The custodians make their money investing your idle cash.

#2. Pay 0% for portfolio management.

In olden times portfolio managers would get 1%. That doesn’t work any more. Competition has cut the rate to 0%.

Fidelity has index funds with 0% annual fees. BlackRock’s iShares lineup includes a portfolio of 3,583 stocks that charges a small amount but earns it back by lending out your securities. (Ticker: ITOT; details here.) Vanguard hasn’t gotten down to 0% yet but is close enough.

You don’t want to settle for an index fund? Some stock pickers are winners, you say. Well, let’s take a collection of stock pickers today, then come back in ten years and see how they did.

Half of them will have beaten the market, before fees. Half will have done worse, before fees.

I can’t identify the good guys in advance. Looking at who did well from 2009 to 2019 provides only the faintest of hints about the 2019-2029 winners.

This is what I can tell you: Collectively the stock pickers will do exactly as well as the index funds. Before fees. After fees, they will do worse than the market, by the amount of their fees.

#3. Pay for expertise. By the hour.

In that furious battle over the fiduciary rule, the “fee-only” planner, who collects an annual fee but no sales commissions, is supposedly on the side of the angels. I’m not sure about that.

The annual percentage fee is a relic of ancient times when advisors could earn their keep managing portfolios. Typical: 1% a year.

Surgeons get paid well. But do they get a percentage of your net worth? Ridiculous.

Why should a financial advisor get a percentage of your net worth for telling you whether to pay off your mortgage or how much to put in the grandchildrens’ 529s?

Sometimes the percentage arrangement is unfair to the planner. Say an obstetrician has just finished her residency and is opening a practice. Her income is high, her need for financial advice is high and her net worth is $0. Why does the planner have to undercharge her and hope to make it up later?

Usually, the unfairness goes the other way.

I just heard from a reader in North Carolina who is 59 and thinking about retiring in three years. He and his wife will have $2.7 million saved up, from which they’ll pull 4% a year. No kids. No complications.

He’s been paying advisors 1% to put him in index funds and send him quarterly commentaries he doesn’t read. Why, he asks me, should he give up a fourth of his retirement income to get a list of index funds?

Why, indeed. If you want a list of funds, with allocations to bonds, U.S. stocks and foreign stocks, I’ve got one, my 4-3-2-1 plan, right here. It’s free. Suitable for anyone with $100,000 to $10 million.

If you don’t trust that, go to Vanguard and look up the target date fund for your age. It will have allocations to bonds, U.S. stocks and foreign stocks. Since Vanguard’s allocation is not copyrighted, you can knock it off, using cheap ETFs like that zero-cost thing from BlackRock. I have a directory of cheap index funds here. That’s free, too.

Portfolio allocation is cookie-cutter stuff. Don’t pay for it. But you should pay for expertise that isn’t cookie-cutter.

Would it make sense to sell your appreciated securities to pay off a mortgage? That’s not a simple question. Is there a way to help the grandkids without screwing up their tuition aid? The advisor needs to know a lot about Fafsa.

Pay by the hour if you can, or maybe by the job, the way you pay a lawyer or CPA. If you just need advice on a mortgage or when you can retire, maybe $250 an hour. If you’re recapitalizing a small business under IRS Reg. 25-2701 with cumulative preferred stock, $900 an hour is more like it.

Hourly-fee planners are scarce, but I expect, as people like that North Carolina investor tire of paying $27,000 a year for not much, they will become more plentiful.

I have a directory of hourly planners here. I’d like to expand the list, and I’d especially like to see more $900 advisors on it. If you are a planner and want your name added, follow the instructions.

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Three Steps To Making Your Financial Planner Honest - Forbes
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