The Cost of a Fee Based Financial Planner
“There are worse things in life than death. Have you ever spent an evening with an insurance salesman?”
In general, there are three ways that financial planners make money:
- Fee-based (e.g., commissions) – where they get paid when you buy a product (life insurance, brokerages, annuities, etc.)
- Fee-only planners who take a percentage of assets under management – where they get paid based on how much of your assets they manage. They typically take between .5% and 2% of assets as a fee. (http://moneyover55.about.com/od/findingqualifiedadvisors/a/finadvisorfees.htm)
- Hourly fee only planners – where they get paid hourly for the work that they do for you. I am an hourly fee only planner, in case you did not know).
It is my belief that commissions create a moral hazard, as advisers who get paid for placing you in certain products are going to steer you to those products. A commission-based advisor who recommends you go into no load, low expense index funds and low fee term life insurance will starve.
What about fee only planners who charge a percentage of assets under management? Certainly there are ethical planners who can manage assets and have their clients end up ahead of where they would have been without the planner. There may be some of these planners who are worth their money, but they are few and far between. Remember that most actively managed mutual funds do not beat their index averages and comparables. (http://www.investopedia.com/articles/mutualfund/05/activepassive.asp#axzz1q9EidBEF) It generally takes 20-25 years to determine if a mutual fund manager is beating the market because of skill as opposed to getting lucky. (http://www.nytimes.com/2011/10/09/business/mutfund/in-mutual-fund-returns-skill-or-just-luck.html) As a result, advisers tell you to pick someone who has a 20-25 year track record of delivering market-beating return.
What’s the risk of picking someone who has that track record?
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Jason Hull is a Fort Worth fee only, hourly financial planner who serves clients in Fort Worth, TX and Dallas, TX as well as serving clients nationwide.
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Hull Financial Planning is a Fort Worth, fee-only hourly financial advisor. The cities we serve in the Dallas-Fort Worth area include:
Hull Financial Planning, 2939 Crockett St. #315, Fort Worth TX 76107, (817)476-0584