What Is Advice-Only Financial Planning?
Financial literacy is not taught in our schools. Money is not mentioned around the dinner table. Yet, Wall Street obfuscates investing and “financial advisors” hide fees and commissions. The solution? Advice-Only Financial Planners.
Dave Ramsey is fine for the masses who need emotional support with debt. Suz Orman is great if you need a helping hand on the basics. But what is there for those who know how to make money—to build wealth—and want to plan the next steps? A financial planner?
Paying for financial planning is confusing and expensive. Watch out for incentives! If you have an insurance salesman giving advice, you might wind up with complicated life insurance and annuity products that you don’t need. With a commissioned salesman—a broker—you get sold expensive mutual funds. Worse still, fee-based folks wrap fees around your investments and metamorphize from fiduciaries to salesmen pitching their employer’s best interest. Even Fee-Only Fiduciaries hide their fees behind Assets Under Management laced with conflicts of interest.
The solution: Advice-Only Financial Planners.
What is Advice-Only Financial Planning
Advice-Only Financial Planning is the comprehensive process of designing money-related goals and outcomes achieved through a transparent and incentive-aligned relationship that minimizes conflict of interests.
Advice-Only is fiduciary by definition. That is, the client’s best interests are always front and center. Beyond Fee-Only (which merely means lack of commissions), Advice-Only implies assets are not managed for profit.
Currently, many “financial advisors” seek to gather assets. There are two aspects of the asset management model that are particularly troublesome.
First, there are inherent conflicts of interest when a “fiduciary” attempts to service a client through assets under management (AUM). Would they have you pay off debt or invest more with them?
Second, and even more important, assets have very little to do with the planning process! A goal of financial planning is to have enough assets to cover life’s liabilities, but to make that the focal point of the relationship under-represents the importance of the actual value of planning: true financial advice!
Financial advice is not merely a value-add to stick on top of asset management. Financial Advice is the true purpose of financial planning. Advice is the value.
What are the Conflicts of Interest in Financial Advice?
Above, a reproduction from a Advice-Only Financial Planner. He doesn’t call himself one, yet, because it is a relatively new term.
This table needs to be seen by everyone who is already knee deep in receiving advice. Fee-only advisors are broken out on the left and commissioned/wrap folks on the right. It is color coded and obviously red is bad.
The issue for the consumer is twofold. First, you already need to have a relatively sophisticated knowledge of the financial industrial complex to even understand how fees are charged. And, beyond that, true financial planning is only provided by less than 0.1% of non-AUM advisors out there.
Why is it so hard to find good, conflict of interest free advice?
Why is it difficult to find an Advice-Only Planner?
Money. You guessed it. Money.
It is much more profitable to sell insurance or pitch commissioned products. Moreover, many “financial advisors” are switching to AUM because once you gather enough assets, money pours in the front door even when you are not home. Clients not infrequently don’t even believe they are being charged fees, yet they bleed 1-2% of their assets yearly. Overtime, the damage is massive (30% of your returns)!
Today’s pain, however, is zero as you neither see nor feel the money being deducted quarter after quarter from your “planner-advised” accounts.
My hope is, honestly, that more folks will wake up and realize they are paying way too much to have their assets managed and not getting the sound, quality advice they deserve.
After all, asset management is a commodity these days. Asset management is easy! Don’t pay an advisor for asset management.
An Example of True Planning
When you go to the doctor and get a prescription, she doesn’t come home with you and administer the pills every day. Imagine how expensive that would be! Yet, that is the model of financial advising that represents AUM.
You don’t have your CPA balance your checkbook.
Other professional do the things only they can do, and leave you to do the rest!
A true Advice-Only Financial Planner helps you plan the big picture items like goals and dreams. Then, together, you find a path forward financially.
The client, with the help of technology, implements the details. After all, once you set up the 401k, how often do you want to “manage” it? Money is like soap: the less often you touch it, the more there is.
Conclusion: Advice-Only Financial Planners
So, there you have it.
Fee-only, in the professional parlance of the financial planning world, is good. But what is ever good about a fee? Clearly though, fee-only is better than unnecessary complicated insurance products and expensive commissions.
Fee-only is good. Fee-only is fiduciary and held to a higher standard than other types of financial advice. The downside: it is still laden with conflicts of interest… and AUMs.
Fee-only is good but Advice-only is better! Why not Advice-Only? After all…
The value of financial planning is the advice.
Once you decide you need advice, why not pay for it as you pay for all of your other professional services? Don’t pay your doctor to come home with you and administer your pills twice a day before meals.
Get the advice you need, when you need it. Fees matter. As do incentives and conflicts of interest.
Fee-Only is no longer enough. Go for Advice-Only!