I think the point is that any compensation approach creates incentives. Sometimes those incentives are not in the interests of the client.
“Should I pay down my mortgage or should I do a Roth conversion?” Advisors who are explicitly or indirectly compensated as a percentage of AUM have an incentive to argue agains such moves, which may or may not be in the client’s interest, depending upon the circumstance. My fee-based FA has raised the idea of Roth conversions several times, but when they analyze it, they conclude that a conversion does not make economic sense for me. On the other hand, we have done back door Roth investments.
The other FA I use is AUM-based and does get commissions but is a fiduciary. In a previous incarnation, they used to proposed intriguing investment opportunities with high hidden fees. The current team is more straightforward, though they are looking to set up separately managed accounts (both for bonds and for some equities). It can make sense for bonds as they behave a little differently than bond funds but I have a hard time seeing doing something like that for equities.
Since I’m aware of the potential conflicts of interest in either case, I evaluate proposals understanding them, although I think the first group is pretty good about putting the clients front and center.
Whether I Roth convert or not has no bearing on what my advisor makes. In fact my last conversation with him specifically included that topic, among a few other things. We talked for an hour, and he spent an additional 1.7 hours on a 24 page report that covered all of the things I wanted to go over. I paid him $945 (27 six minute units at $35 per six minute interval). That’s how fee only advisors work. They have no conflict of interest. You pay for their time. That’s it. They, as a rule though do not manage. They fill an advisory role for those of us who feel comfortable managing our finances on our own.
Just borrowed Napkin Finance and the Paul Lynch book. The Napkin Finance is a nice easy read with a good glossary of terms in each of the short chapters. It’s pretty easy reading and gives a nice basic overview. It even has multiple choice T/F questions at the end of every chapter so you know whether you understood the main points.
Sadly, many of the “fee only” advisors I have found don’t sound like “fee only,” as they want a % of your assets. No thanks!
Several of the financial advisors I’ve been referred to purport to be “fee only” fiduciaries but still want a % of all your assets annually. No thanks!
I have read several comments about annuities in this thread. Partial knowledge can be dangerous. Annuities are a bit more complex than most understand–including licensed annuity salespersons and fee only financial advisors and financial planners. Same regarding cash value life insurance policies.
Legal advantages vary by jurisdiction–which is usually state by state.
Different investment strategies can be structured with the use of annuities to both guarantee return of principle plus interest while still protecting against inflation.
Just like there are good, bad, competent, and exceptional professionals in law, medicine, real estate and other fields, there are good, bad, competent, and exceptional professionals in the financial planning field. Requires both legal knowledge/expertise and financial product knowledge/expertise.