GLENN WOODY
FINANCIAL CONSULTANTS, INC.


Costa Mesa, CA La Quinta,CA
JUST SAY "NO "
TO BROKER COMMISSIONS

Probably the most important decision a financial consumer makes is the selection of his/her/their financial advisor. It can be a scary process. Not only must the consumer find someone that he or she trusts impeccably ( that can be hard enough to find in a friend or a mate! ), one also must decide how he or she wishes to compensate the planner: (1) on a fee-only basis; (2) a commissioned basis; or (3) a combination of both.

More and more upper and middle-income people are demanding financial advisors that work for them strictly on a fee-only basis. Why? They want their advisor to be independent and objective. That is, they neither want their advisor to sell any investment or insurance products nor receive any compensation from products that the advisor recommends. The client simply compensates the advisor either hourly or on a fixed-fee basis for his or her advice, including implementation assistance. Thus, the client is free to either take it or leave it. The fee is the same regardless. This phenomenon is a major change from the past.

Breakup of the Financial Services Industry

Historically, the financial services industry was vertically integrated. That's a nice way of saying that the manufacturers of investment and insurance products were in bed with the broker/dealer (distributors), and the broker/dealers were in bed with the financial advisors/planners - sometimes the same bed. Not surprisingly, independence and objectivity normally become extremely difficult when everyone is sleeping together, figuratively speaking of course. As a result, the framework of the financial services industry began to come unglued. The industry increasingly is becoming fee driven as opposed to product driven. Upscale consumers want their financial advice separate and apart from their investment and insurance products. Further, once they pay for and receive objective advice, they don't want to be sent down the street to a commissioned broker/dealer for implementation assistance and pay another fee in the form of a commission.

To the contrary, consumer research indicates that clients, more than ever before, are looking for one-stop financial shopping including implementation assistance on a fee-only basis. Further, they want this financial advice from someone that they trust, someone that will stay with them and help them on a day-to-day basis.

There's No Free Lunch

Most of us would readily agree that there's no such thing as a free lunch. However, most of us also would agree that it doesn't make sense to buy something retail if we can get the same quality and quantity wholesale. That's what we're talking about when we talk about load vs. no-load mutual funds. Whereas a loaded fund normally has between a 3% and 8.75% sales commission, plus an annual management fee of approximately 1%, the no-load fund simply charges the management fee. Thus, the consumer on average can expect to save 5% or more by investing in no-load as opposed to loaded funds. It's interesting to note, that we're beginning to see more low-load funds in the 3% range as the popularity of the no-load funds continues to increase. Even 3% however, makes more sense than paying a commissioned sales person much more for an investment product of theirs that you probably don't want or need. For instance, some investment products such as limited partnerships can have loads as high as 15%. As for insurance products, depending on the type of product, their hidden commissions run as high as 60% of the first year premium and sometimes substantially higher than that.

Choosing the Right Advisor

Although the stakes may be much more critical, selecting a financial/investment advisor is not unlike choosing any other person that's going to work for you. Choose someone that you trust! If you can't find someone that you trust, then do whatever needs to be done yourself to the best of your ability or don't do it at all. As for investment advisors, select a buyer, not a seller. Pick someone who will function as your purchasing agent on a fee-only basis to insure that retail seller commissions are eliminated. In most cases, commission savings alone will more than pay the fee charged by the advisor. Further, try to pick someone who has excellent academic and professional credentials, an outstanding track record and is accountable to a very strong code of professional ethics, such as that of the Institute of Certified Financial Planners Registry of CFP Licensed Practitioners.

As Gourgues and Lauterback explain in their book entitled The Revolution in the Financial Services Industry, "management of health and management of wealth have much more in common than rhyme." The financial services industry is becoming much more like the medical profession with financial manufacturers, distributors and advisors/planners paralleling medical manufacturers (pharmaceutical houses), distributors (drug stores), and advisors (M.D.'s). Thus when we're ill, we go to an independent and objective medical doctor that we trust to get a diagnosis and prescription, and then on to the drugstore to pick-up the prescription. Almost invariably, when we shortcut the process by eliminating one of the roles, the end result is bad. The same thing can be said of financial planning and investing. Ask yourself, would you go to a physician who also sells or profits from the prescriptions they write?

Some Questions To Ask

Money isn't everything, but when it comes to conflicts of interest between financial planners/investment advisors and their clients, compensation is the single biggest source. There are some questions to ask before you sign up with a planner.

Also, always ask the planner/investment advisor for a copy of his/her disclosure statement regarding who he is, what he does, and how he does it. Most larger ( above $25 Million in Managed Assets) financial planners/investment advisors are required by The 1940 Investment Advisors Act, as interpreted by the Securities and Exchange Commission, to register with the SEC as a Registered Investment Advisor (RIA) and to provide the aforementioned disclosure statement prior to or at the time of engagement.

Frankly, we remain convinced that the reason so many consumers continue to deal with a commissioned planner/advisor as opposed to a fee-only planner is "sticker shock." They would rather not know how much they are paying and/or losing and would rather think that they're getting something for nothing than deal with the reality of writing a check. In the end, each of us must make our own decision and hope that it's the right one - whether the planner be fee based, commission based or some place in between.
GWFC

Glenn D. Woody, CFP
President

151 Kalmus Drive, Suite C-150
Costa Mesa, California 92626
(714) 850-0534 (714) 850-0934 FAX
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