Avoiding Appalling Fees For Sound Financial Advice
A Brief History
In the 1990s, I entered financial planning with yahoo recruiters from Primerica Financial Services who shouted “Buy Term and Invest the Difference” because whole and universal life insurers drained savings from middle-class Americans. Still appalled by fees, two of my elderly tax clients paid over $20,000 in assets under management fees for conservative (bond heavy) portfolios that didn’t merit payment for management time or successful risk taking. These non-deductible fees exceeded ten per cent of the clients’ yearly incomes! How can SLV investors of modest means get the advice they need to thrive with longer lifespans and higher healthcare costs?
Whole life insurance was the financial plan for 1950s clients who paid appalling commissions for confusingly jumbled policies which challenged comparison with affordable term insurance or superior mutual funds. The 2024 ACLI fact book shows that sixty percent of policies issued and 28% of face value are still permanent policies—with only forty percent in affordable and transparent term. Nerd Wallet writes: ‘…typically, life insurance agents receive as commission 60% to 80% of the premiums you pay in the first year. They collect smaller commissions in subsequent years. Added up, 5% to 10% of all the premiums you pay over the life of the policy could go to commissions.” Commissions serve prodigal investors who trust brokers enough to believe they need insurance and annuity savings products.
Stockbrokers helped wealthy clients trade in the 1950s, but they sometimes churned trades for extra commissions. CFP Kemp Fain declared: “Long term to them was 5 P.M.” E-trade was instrumental in lowering stock trading prices and its CEO, Mitchel Caplain writes: “It was $100 a trade a few years ago. Then all of us came to about $20. And now all of us are converging at $10 or so…”
1970s and On
Mutual Funds essentially began in 1924 but charged loads (commissions) that typically drained 5% from savings. Deregulation in 1975 fostered no-load and exchange trade funds (ETFs) and average actively managed fund expenses dropped under two per cent per Morningstar, with lower expenses fairly charged on bonds and passive index funds.
After 1981, better PCs enabled independent financial advisors to help more clients in fewer hours with potentially lower fees. LDAs and Legal Zoom competed with lawyers on estate planning while Turbotax and Enrolled Agents competed with business-trained CPAs on trusts, 1040s and IRS representation. The CFP Board applauds any fee structure that serves the consumer well: commissions, assets under management or retainer fees. But CFPs typically charge assets under management fees, usually around 1% with sliding scales. This structure introduces potential biases against realty, loan repayment, commodities, business or even company-managed retirement. CFPs may ignore client centered comprehensive planning for lucrative asset management. And elderly people with bonds typically pay far more than if they had paid retainer or hourly fees. AUM fees work well for clients with larger, more aggressive, portfolios and long-term planning challenges.
I applaud planners’ pro bono work but know this won’t grow a well-educated, exam tested, fiduciary financial profession to better people’s lives. Robo-advisors may do well with asset management categories, but it is not clear that they can do the psychological work of understanding their own inner feelings, fears and aspirations, the leadership of breaking bad habits, inspiring savings and preventing panic. Without systematic financial education, amateurs may not spot solutions involving diverse knowledge bases. Of course, anyone is free to do their own financial planning, but the financial risks are greater than those from driving a car you fixed.
The Garrett Planning Network in 2000 envisioned “a service provided on an hourly, as-needed, fee-only basis.” Financial plans can be drawn up for under a thousand dollars but regular updates and portfolio balancing cost money and planner time and follow up is rightly part of planning. Clients with small portfolios or portfolios without manageable stock might do best here. The CFP Fiduciary ideally acts in the clients’ best interests and does so best with fee structures that avoid biases. $10,000 retainer fees are unrealistically expensive for most Ben Lomond area clients, so I charge much less and wonder how lower priced services for Masters Degree financial education can foster sound decisions.
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals.