In a recent magazine targeting those of us in the financial services industry, the author of one article pointed out how representatives of the larger wirehouse brokerage firms like Merrill Lynch, Smith Barney and Morgan Stanley were moving to become more like independent advisors and to provide more broad financial planning advice. The article went on to say that many clients of these firms were paying $4,000 or more for the financial plan.
This caught my attention because $4,000 isn’t an inconsequential amount to most of us. I’ll be the first to say that spending a few thousand on a financial plan might be the best investment you could make in yourself for the future benefit of your family – if it is a good plan, and if you actually follow the plan.
My two “if’s” above are based on experience. The first potential problem with a financial plan is that it may be slanted toward promoting certain investment products or services which earn the financial planner who designed the plan a high level of compensation through sales commissions and trail fees. Representatives of brokerage firms are not required to disclose all conflicts of interest or their compensation when promoting these products.
That’s not to say your planner isn’t doing the right thing for you and recommending good investment products with reasonable fees, but there are questions that need to be asked. For example – is there a low-load or no-load equivalent investment that could be used instead of the one that pays the planner a 5 to 7 percent commission? After all, if you’re paying $4,000 or more for a financial plan in a binder to put on the shelf, should you also have to pay full commissions?
The next issue is implementing and following the plan. We’ve met many people who paid for financial plans, but when they bring them out to reference during a meeting, the pages inside are still pristine and the cover of the binder needs to be dusted off. This is a sign of good intentions that were not followed up on. Perhaps the initial plan was acted on in terms of allocating investment dollars, but then the progress of the plan is not monitored and adjusted as necessary.
A true financial plan is generally broad in scope, encompassing several areas related to your finances. Investment, tax planning and preparation, estate planning, and insurance are all generally included in a comprehensive financial plan. For some, with larger net worths (>5 million) and incomes that put them in the highest tax brackets, this comprehensive plan is a good idea.
For most, the important part of the financial plan is the retirement income component. In other words, having a plan for accumulating assets, so that when you decide to retire, those assets can create income, which can be used in conjunction with your Social Security benefits and any other pensions related to past employment to provide a good lifestyle with a low chance of you running our of money during your lifetime. This is known as a retirement income plan and is sufficient for most cases we have come across. And, it shouldn’t cost anywhere close to $4,000.
In summary, financial plans are fine if they are credibly designed with your interest in front of the planner’s interests and if you pull the plan off the shelf a couple times a year to check your progress and make necessary adjustments. Remember to ask questions about lower cost investments for the plan, and consider whether you need a full-blown financial plan or will just handling the more important portions be sufficient for you.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. www.breitercapital.com
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.