Interview with an Enthusiastic Holistic Fee-Only Financial Advisor

This spontaneous interview is one advisor’s take on the troubling conflict of interest issue which is so prevalent in the financial industry. Bill is a holistic fee-only financial advisor and he’s telling me about how his colleagues avoid conflicts of interest.

Bill: Holistic fee-only financial advisors must be fee only.  So, the only compensation they get is directly from their client. They don’t get any money by selling products. They don’t refer people to other people and get a kickback.  The only way they get money is by being paid.

Stan: Oh, okay. Isn’t getting paid a percentage of assets under management conflict-free too?

Bill: Now, ‘assets under management’ is one model that’s fee only, in which you charge a percent and it’s usually less than 1% (I don’t know what the percentage is actually because we don’t use that model) of whatever assets you’re managing.

Holistic people get a retainer fee. The retainer fee is based on what your assets are, what your income is, and the complexity of your situation. So, taking into account these three things there’s a fee calculator that calculates an initial year and then an annual year fee. The client pays the fee to the advisor, and the advisor, in that initial year, takes a huge look at everything financial, basically.

Stan: Um hmm

Bill: Insurance, estate planning, asset allocation, and asset reallocation. Oh, what am I forgetting?  Real estate. I know I’m forgetting some things.

Stan: That’s okay. Don’t worry about it.

Bill: Taxes, tax prep. Anyway, there are several meetings a year, and the clients are encouraged, begged actually, to call the advisor before they make any type of financial decisions so that their advisor can save them from making dumb decisions ahead of time.

So that’s how holistic fee-based advisors get paid.

Stan:  Oh, okay. Well, that’s interesting.  Yeah, because I thought they were paid ‘assets under management’ to tell you the truth, because I’m used to that, but…

Bill: Yeah, that’s probably the standard. There are problems with that from my perspective, in that your income is dependent on how many assets you’re managing. So, you may be more interested in their investments, say, than you are in tax planning or insurance issues or how good they… you know.

Stan: Oh.

Bill: You’re providing those services, and if they have a very, very complicated tax situation because they’re a small business owner or whatever, or they have a bunch of investment property or something. You know, they are a landlord.

Stan: Okay.

Bill: You may want to provide those, but you may be saying, “You know what? I don’t think you should buy another building. I think you should invest that money.”

Stan: I gotcha.

Bill: I’m sure that most people who are ‘assets under management’ holistic financial planners are doing their very best.

Stan: Yeah.

Bill: But it becomes murky. You know, the lines aren’t quite as clean.

Stan: I gotcha.

Bill: Are they suggesting you not buy another apartment building because you really should diversify and not have all your eggs in one basket, or are they making that suggestion because their fees goes up.

Stan: Oh, okay.  I get it.

Bill: These different issues can cause a conflict of interest.

Stan: Okay. You’re great Bill.  There’s one last thing, and I want you to go, but the other system I know is they just charge by the hour.

Bill: Right.

Stan: Now, that sounds like there’s no conflict.

Bill: I agree. There is absolutely no conflict.  What we’ve found is that when people are charged by the hour, the clients have to do a cost-benefit analysis in their head every time they want to have a meeting. “I’m going to… (oh, I don’t know). I have been offered a buyout, an early retirement buyout from my company because they are tired of paying me the big dollars, and they want to hire somebody for less money.  So, 20% of us are getting these buyout offers. Do I want to pay someone $200 an hour to take a look at this, or should I just make up my own mind ahead of time.”

If it’s an open retainer, you’ve paid your money already. You have access to the advisor all year for no extra money.

Stan: Oh.

Bill: That’s the difference.

Stan:  Oh boy.

Bill: They probably don’t have enough knowledge to make that call correctly all the time. The other thing is holistic fee-only advisors want to have long-term (like decades long) relationships with people where they intimately know what these people’s goals are, where they’re headed, what their money’s for in their lives, and to be intimately involved in those decisions.

You really need the people to come in frequently. You know, three or four times a year after they get set up and feel free to call you or email you or just ask you questions about stuff as it comes up.

You know, our advisors know how many kids they have, where they want to send them to school, you know, all of the stuff that falls into somebody’s financial life eventually. These people like taking extravagant vacations, so you’ve got to make sure the cash flow will handle that.

These other people want to retire as soon as possible, so you got to pack as much as possible into their retirement savings. These folks will likely have some heavy-duty burdens in terms of taking care of their parents for whatever reason, family history or a slow-moving illness that they know eventually will impact mom or dad, and they’ll need to help financially. Therefore, you have to structure their investments differently so you can have access to money without penalty.  All that other stuff.

Stan: Okay.

Bill:  We tend to be really like money/social workers.

Both:  [Laughter]

Bill: Really like working with money. Not really piles of money, but really find finances fascinating and really want to be a real force for good in people’s lives and have ongoing relationships with people It’s easier to maintain with a …

Stan: Retainer.

Bill: With a retainer than it is hourly.

Stan: Oh, okay. You’re wonderful. You’re a terrific salesperson for that system. [Laughter] Wow!

Bill:  I’m pretty enthused about this.

Stan: Wow!

I’d like to have readers weigh in with your take on conflict of interest. Does having a practice that is conflict-free mean much less stress? Is it really better for the client? Is it really better for you? What do you think?