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Is Fee-Based Financial Planning Objective?

Not in the popular vision of how the term "objective" is used, no. But perhaps I should explain myself.

Most financial advisers want to be known as being a good guy (or gal). That means "taking care of your clients" or "placing your client's interests above your own"...which also leads to the discussion of fee based financial planning. The story goes that if you are charging a fee for your services, and you are not accepting incentives (like selling commission-able products), then there won't be a conflict of interest. That is what is passing these days as "objective". I think that's nonsense.

The term "objective" means to be independent of anyone's thoughts, feelings, or wishes.

To tell you the truth, I'd be cautious working with someone who proclaims that he or she has no financial incentive in working with you. I'd be skeptical because, in all likelihood, that person is lying. Nobody works for free, at least not professionally. If they are donating their time, that's one thing. But, they aren't making a business out of it (charities aside).

A financial professional is a professional. They are running a business. When is the last time you saw a business operate without financial incentives? Never? That's what I thought.

The "flaw" in the fee-based model argument

The fee-based model of financial planning is supposed to be the "holy grail" of financial planning. The argument is that if a planner sells products where he or she earns a commission, then there is a built in conflict of interest. I hate to break it to those fee-based folks, but there's a conflict of interest built in whenever your interests aren't aligned with your clients - and right now, that pretty much includes all acceptable (according to the Government) ways of conducting a financial services company.

If you charge a fee for service, you're charging for your time. That's it. It doesn't mean that you are incentivized to help your client do well in their investments. In fact, you're not. You're not incentivized as a fee-based planner to do anything except sell your time. The more time you sell, the more money you make. Do you know where I'm going with this?

What's to keep a fee-based planner from stringing his clients along with financial plans so complicated that you need a degree to decipher them? Or, to sell plans without ever giving away all the "good stuff" - just enough to keep the clients coming back for more advice? The answer is: nothing.

Think about it. If a fee-based planner gave the very best information away on the first series of meetings, what does the client need him or her for in the future? The constant adjusting and tweaking every year gives the adviser a reason to charge more money to his or her clients.

I'm not saying that any of this is bad. I'm just trying to point out that the fee-based planner's argument doesn't hold up when applied to his/her own method of doing business. Everyone is trying to maximize their income - fee based planners included. And, they are going to do that within the context of their own business model. If they're not working to maximize their own income, then they're going to go out of business - end of story. It doesn't matter whether an adviser is selling products or whether they are selling their time. They're still making a commission - the only difference is what they are selling.

Both could potentially be guilty of selling crappy products after the fact.

An objective approach

An objective approach would start with defining a purpose. Then goal setting - regardless of how your adviser gets paid - and then working towards achieving those goals which are directed towards a particular purpose. So, it really doesn't matter how much money your adviser makes. He earns big commissions from those life insurance or mutual fund contracts? Who cares! Seriously. She charges a "modest fee"? Good for her. What does it matter?

If one client approaches two advisers with the same goals and the adviser uses two different approaches to help the client achieve those goals, and one adviser ends up making more money than the other because they either charge high fees or only sell big commission-able products, it is irrelevant to the real issue, which is: are the client's goals being met according to the terms of the working agreement between the adviser and the client?

Kudos to the adviser who is maximizing profits and fulfilling their contractual (or implied) agreement with their clients.

This entry was posted on May 27th, 2009 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Philosophy In Financial Planning

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