Should you pay fees to your investment advisor and why?
Got a toothache, see your dentist!
Got skin problems, see a dermatologist!
Got problems with managing your finances? Well, that’s when you might want to consult an expert, a good financial planner.
The reasons could be anything- Maybe you've come into a large inheritance or your own income went up suddenly or maybe you just bought or sold a business. Are you feeling uneasy about about your money ?-- you're not sure where it's going now or how far it will take you in the future. Will it sustain me throughout my retirement? Will my children's education be met?
Whatever your money problem, getting an expert hired always reap good results and gets everything streamlined. Many people don't realize that hiring a financial planner can be a good investment. For some people who let important financial decisions go just because they don’t seem to get around them, will eventually tend to take their finances into bad shape in their financial life affecting them and everyone around tremendously.
The need to consult an expert may leave you with options like a CFP (Certified Financial Planner), CFA ( Certified Financial Analyst), CLU (Certified life underwriters) etc.
Don't be. If you are thinking about an accountant or insurance agent who also does financial planning, be careful, since they are earning commission and brokerages and may not always work in your interest. You should be looking for a CFP.
Starting with a CFP means a lot. It means they have gone the extra step of education and training. CFP is a gold standard and they have kept ethics of the client always in mind. They will always work in the interest of the client.
Once a person decides to have a CFP to manage their finances, he/she needs to understand the fees structure payable to a financial advisor. Many times people are not very convinced as to why or how the financial advisor charges her/his fees.
There is nothing like cost of one kg financial planning or cost of 100 gms of reviews. Financial planning is not a commodity or product so there can be no standardization. However, we will find that every planner talks about similar aspirations like retirement, investment, insurance etc. or risk profiling, data collection, asset allocation etc. the basic components of a plan are the same. Just like Tata Nano or an Audi Q7 will have the same components like tyres, seats, steering wheel & will use the same fuel. But they are still very different cars and will serve different categories of people in different ways.
Hiring an experienced and professional financial planner costs money. In India currently, CFPs charge anywhere between Rs 10,000 and Rs 40,000 to make a plan, execute and monitor it. It’s no point having a plan done from self-proclaimed planners who are actually insurance agents or mutual fund distributors doing it for free and in the end recommending the products they want to sell.
How can we validate a logical fee structure of a financial planner?
Planners are in profession of advice but the scarcest resource they have is time and most valuable thing they have is wisdom. So either they can charge for their time or wisdom or combination of both. The price should reflect the value that they are offering to the client. If the client is able to see value proposition, he/she will find it easier to be able to pay. Clients should also keep in mind that a planner is also a business owner. He/she is charging for taking care of your financial future. This needs to be compensated well to keep his/her business viable. Adequate compensation will ensure quality people enter the profession and stay in it. If the profession does not pay well, all the good people will move out to alternate professions. The clients may end up with sub-standard advisors who might not be good for their financial health.
Certified financial planners structure their charges in this manner: Fee-only, feewith commission, fee-offset and commission only.
Simply put, planners who make a commission do so on the financial products they sell -- insurance policies, mutual funds, etc. Some charge a fee and collect commissions on what one buys from them, others offset the commissions they earn against their flat fee, and some work on commissions alone.
Bankers and even accountants today receive commissions in the same way and we barely blink an eye at it.
Fee-only planners, on the other hand, charge a set amount, either an hourly fee, flat fee for a comprehensive plan, and do not earn any commissions. Some fee-only CFPs may not be registered to sell financial products.
Just to give a vague idea as to what are the costs involved in financial planning for a CFP here is an illustration :-
|A. Principal Planner's Earning:||2000000|
|(can be based on his experience)|
|B. Operating Cost:|
|Stationary & Printing||60000|
|Online Portolio Viewer||25000|
|Website/Blog & Client Data Portal||25000|
|(US planners spend Rs 6-9 Lakh per year)|
|CA & Audit||25000|
|Membership & License||25000|
|Compliance Cost (US its 25-30% of revenue)|
|C. Firm's Profit||1178667|
|(Firm's Profit Percentage %)||25%|
|Revenue - after tax (A + B + C)||4714667|
|Tax Rate - Approx||20%|
|Total Revenue - Before Tax||5893333|
|Number of Clients||150|
|Revenue/Fee per Client||39289|
* Please note- the above is for illustration purpose only and does not in any way have a bearing on actual costs and expenses borne or income earned by Dilzer Consultants Pvt Ltd
Which if better off? Fee-only or commission?
This purely depends on the type of client, nature of his assets, investments and requirements. There are good planners in both categories. One is not necessarily better than the other, but one may work better for one specific client.
The best way to find out this or even may be whether really to hire a CFP or not is to TRY IT OUT. Try financial planning with a well known, recognized financial planner for one financial year. There is definitely the need (demand) and the expertise(supply) that match.
Hiring a financial planner and also implimenting the blue print of a financial plan detailed to the clients specific needs, helps the planner track and be aware of every financial decision her client is making and therefore, the planner will make recommendations accordingly, keeping these variables in mind.
Customers also have an option to create a financial plan and impliment recommendations on their own- maybe because they have the expertise, maybe because they want to have the authority and freedom to impliment on their own, or sometimes to simply validate their investment decisions- they want a second opinion.