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"If I was your financial adviser, I would tell you that engaging me is not a good deal for you." I’ve told hundreds of prospects this over my nearly 40-year career as a financial planner.
I can make a good argument that almost everyone would benefit from having a fee-only personal financial planner to advocate for their best interests. Yet it’s not in everyone’s best interest to engage one, especially when they can’t afford one.
While it certainly isn’t in an adviser's own financial interest to turn away business, a true client advocate won’t hesitate to do so. A fiduciary planner’s responsibility to put your interest first doesn’t start when you become a client. It extends to the advice they give you when you are a prospect.
This is quite different from financial advisers compensated solely by commissions earned on the products they sell. They have no fiduciary duty to put your interests ahead of theirs. Their goal is to sell you their product. It’s completely up to you to decide whether you can afford it.
Why does a fee-only planner's fiduciary responsibility extend to even a prospect? Let's illustrate with an example and some (very simplified) numbers.
Suppose Leslie, who is 23 and employed at an entry-level job, inherits $100,000 from a grandparent. Instead of going on a spending spree, Leslie is wise enough to consult a fee-only financial adviser.
Would hiring the planner to invest and manage Leslie's $100,000 be a good idea? The planner's minimum annual fee is $1,500. Mutual fund fees would add perhaps another $1,250. If the investment earned 7.0% a year, Leslie would have $574,374 at age 65.
Not bad, right? Most consumers would think quintupling their money over 43 years would be really great. Certainly, plenty of commissioned salespeople would willingly sell Leslie a product like a variable annuity, and many brokerage representatives would take on this client without batting an eye. Yet a fee-only planner with a fiduciary duty to put the client’s best interests first would struggle with it.
Such a planner would quickly know the research and the numbers would support Leslie not hiring them, but instead investing in an index mutual fund comprising a diversified portfolio of global stocks. Vanguard has a Total World Stock EFT which costs 0.08% a year. That’s an annual savings of $2,670. If it earned 7.0%, Leslie's $100,000 would become $1,661,406 at age 65.
Someone in Leslie's position has little need to pay a planner an annual fee of 1.5%. There really isn’t much for an advisor to do until the person matures, perhaps has a family, advances in a job, and has saved some additional capital.
What I would tell someone like Leslie is to put their money in the Vanguard Total World Stock ETF, max out their 401(k) plan at work, and come see me in 10 years. I know hundreds, if not thousands of financial planners who would give the same advice.
I would also tell Leslie that seeking advice before you "qualify" as a financial planning client is a wise move. If you think you might need a financial planner, do your research, and interview with those who are legally and ethically bound to advocate for you. If the planner offers the option of a one-time fee to set up a financial plan, this service may be appropriate for you. Otherwise, you may simply be pointed in the right direction to start investing on your own. In either case, you won't need to worry that they are going to recommend products or services you don't need or can't afford.
Rick Kahler, MS, CFP®, CFT-I™, ChFC, CCIM , is founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
