How Should You Pay for Financial Advice?

By Michael Pollock

From robo advisers to full-service professionals, investors have more choices than ever in getting, and paying for, financial advice

Deciding what kind of financial advice to pay for, and which fee structure is right for you, can be daunting. 

The advice market is evolving rapidly, and investors today have more choices than ever before—from expensive, highly tailored advice to more impersonal services that cost next to nothing.

Financial experts say investors should shop carefully, while considering these questions: Do you have a complex financial life, where paying a premium for advice could produce lasting benefits? Or are your needs more basic—such as crafting a starter financial plan—where fees could be much lower?

The Wall Street Journal invited three people to discuss this issue: Terrance Odean, Rudd Family Foundation professor of finance at the University of California at Berkeley’s Haas School of Business; Micah Hauptman, a financial-services counsel at the Consumer Federation of America; and Antoinette Schoar, the Michael Koerner ’49 professor of entrepreneurial finance at the MIT Sloan School of Management. Edited excerpts follow.

Conflicts Of Interest

WSJ: How do investors pay for advice today?

MR. ODEAN: Traditionally you paid a broker commissions for buying and selling stocks. Many people now use fee-only advisers, who charge a percentage of assets under management, often with a scale. 

It may be 1.25% a year on a portfolio with less than $1 million and lower if you have more assets than that.

MR. HAUPTMAN: Investors also can pay by the hour, or by engagement—where an adviser provides a complete financial plan for a fixed fee. Or people may pay a monthly retainer.

WSJ: Ís it always clear at the outset which fee model you are getting?

MR. HAUPTMAN: Many financial professionals market themselves as advisers, using titles like financial adviser or financial consultant. They may be dually registered as broker-dealers and investment advisers. 

If you don’t know which you want, you might be directed toward their brokerage platform, in which case you would be paying for the transaction, not the advice.

WSJ: Mutual funds and ETFs contain embedded financial advice, though it isn’t tailored to the individual.

MS. SCHOAR: Funds in a sense do contain a form of advice in that they provide portfolios that have been preselected. But in itself, that is only a small step toward getting good advice. 

Many individuals use index funds as passive investment strategies and pay advisers separately for add-on services such as tax advice and estate planning.

MR. ODEAN: With mutual funds, there’s sometimes a compensation structure where a fund company gives money to a broker. This can create a significant conflict of interest, because a fund might be charging a high management fee and paying a significant commission back to the adviser or broker who sold the fund.

WSJ: Is any one fee structure clearly in an investor’s best interests?

MR. HAUPTMAN: Every model can have conflicts of interest. Transaction-based professionals may provide quality advice, but their firms may set sales quotas or offer bonuses or other rewards that encourage them to put their own self-interest ahead of the client’s.

MR. ODEAN: The commission structure creates this incentive where brokers would like to see their clients trade more often. But one advantage is that if you are a buy-and-hold investor, you don’t incur the commissions very often.

To continue reading, please go to the original article here:

https://www.wsj.com/articles/how-should-you-pay-for-financial-advice-1489975201