Lloyd Lowe Sr. – Founder & CEO of LD Lowe Wealth Advisory

Article two of a three-part series providing an insider’s look
at the good, the bad, and the ugly of retirement
planning tools, and how they can impact you

There is nothing worse than feeling like you’ve overpaid. If you purchase a product at a retail price, you have some confidence that you are paying for the tangible value that product provides, plus a reasonable markup to the retailer that sells it. With a service, however, you don’t always know what inherent value you receive beyond what you know about that service. When you don’t know what components make up the fee that you pay, it can leave you feeling uneasy and wondering if you’ve somehow been overcharged.

When it comes to financial planning, it is important to remember that you don’t hire a financial advisor for a few months or a year. It is a relationship that will last many years and should be built on trust and mutual respect. And that trust is built by being transparent with one another. So it is not out of line for you as a client to understand exactly what it costs to manage your money.

A financial advisory business, like any business, exists to make a profit. Profit is derived from determining a break even and a reasonable margin on services. There are a variety of ways to arrive at this figure over time, and each choice impacts the management fee an advisor should charge. An advisor who looks at them comprehensively is one that not only arrives at a proper income structure for the business, but the exercise also guides making decisions in the best interest of clients and providing the highest value for their portfolios.

Should I pay a fee for my advisor to develop a financial plan?

There is no question that a financial plan has value to both planner and client. It forms the foundation of your long-term relationship with your advisor and provides the roadmap for the decisions made on your behalf for years to come. In addition, general industry best practice is to evaluate this plan annually and adjust it based on your needs at a particular point in time. Factors that are considered are your time horizon to retirement, your current and projected income, your qualification for social security benefits, your general health, whether you have college-bound children, if you’ve been divorced, and so on.

Many advisors charge a flat fee for this service at the outset of a relationship. Arguably, this approach makes sense. There is certainly a cost involved in both time and tools to create plans. But there is also merit to arguing that this is a cost of doing business for the financial planner, and should be part of the management fee. If the goal is to form a long-term relationship, planners can recoup the cost of developing and managing your financial plan as part of a reasonable management fee.

Regardless of how you pay for it, the most important point about your financial plan is its value, and that value is rooted in your advisor’s approach to creating it. I recently wrote about ensuring your plan is a safety tool and not a sales tool. Financial advisors have a variety of technology tools available to us today to develop plans for our clients.  Many of these software packages have become complex and have behind-the-scenes internal controls, algorithms, etc. Plugging a poor assumption into plan software can lead to disaster. While it may be tempting to make aggressive assumptions on projected returns to help demonstrate that you can retire in your 50s, I would argue that in the long run it does both you and the financial advisor a disservice.

Should I be paying for internal costs and commissions?

The types of products a financial advisor may recommend to you – mutual funds, annuities, 529 plans, and so on – come with internal costs that can impact the total costs and returns to your portfolio dramatically. The existence of these costs has certainly driven many recent mainstream media stories about transparency in compensation for financial advisors. Some products, such as ETFs, have very low internal costs. Other commission-based products may have a higher cost, but can still make sense depending on the goals set out in your financial plan.

When your advisor makes a particular recommendation, it is important for him or her to explain to you why a particular product was chosen and how internal product costs impact the total fee costs of your portfolio.  Another important question you can ask is how your advisor treats commission-based compensation. In our firm, we look at our income structure over a five-year time horizon and we consider first year commissions in the equation. We use a “fee offset” strategy where we waive management fees as an offset to commissions made in the year the commission income occurs. This puts more money to work in the plan and can impact future returns significantly over time.

What other fees should I expect?

The other piece of the cost puzzle involves the direct hard costs of servicing client accounts. Just like any other business, all advisors have the hard costs of paying for office rent, utilities, staff, etc. In addition to these costs, a financial advisor offering comprehensive wealth management services will pay for plan development/maintenance costs and fees related to trading costs and custodial fees. Full-service firms may also pay for value-added services for client accounts, such as tax planning, tax preparation and estate planning fees.

When looking at the total value of what your advisor provides, it is important to know if you are being charged “by the transaction” or if your advisor’s management fee covers these costs. Our firm’s philosophy is to charge a reasonable standard management fee that includes the financial plan, hard costs and transaction-based fees as a simple percentage of the portfolio. We feel charging by transaction can give the appearance of “nickel-and-diming” a client that can damage the foundation of trust that is so critical to a healthy client relationship. It can also mask the total cost you are paying for the services you receive.

How can I ensure I’m getting the value I expect from my advisor?

Good communication is key to the success of any relationship. Communicating with your financial advisor is not unlike sustaining a marriage – both must be built on a foundation of trust that is not easily shaken. When working with a financial advisor, you should expect that person to explain the firm’s income structure in detail and provide a transparent account of fees, including both the product internal costs and the value of hard costs the firm handles as part of the management fee (financial plan, tax and estate preparation, trading costs and custodial fees). A transparent visual representation like a management fee table can help a great deal in communicating value in a fact-based way and go much farther in defining your advisor’s worth and value at the outset of a relationship, more so than an aggressive plan.

Lloyd Lowe Sr. is the founder and CEO of LD Lowe Wealth Advisory in Dallas. If you have comments or questions about the article, they are welcome. Lloyd can be reached directly at lloyd@ldlowelan.com or 972.335.2523.

Investment Advisory Services offered through LD Lowe Wealth Advisory, a Registered Investment Advisor.   Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

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