Are You Getting Your Money’s Worth in Financial Advice?

Measuring value

Recent news about a new fiduciary rule has left many folks more confused than ever about fee structures, and concerned about whether they’re getting the best value from their financial advisor’s fees or their brokerage firm’s fee structure. According to a recent podcast from the Wall Street Journal, it’s not only how much you pay – but also what you are paying for – that’s a source of communication breakdown between those clients and their advisors.

While the Department of Labor is pushing to get advisors and brokers to make it easier for clients to understand their fee structures, so far it doesn’t look like many of the bigger firms are taking them up on it.

Since any firm or advisor can claim to be client-driven, transparent, and “fee-based,” how can you be completely sure about what you’re getting and how much you’re paying? If your advisor is fee-based, rather than strictly fee-only, they may be earning commissions when they recommend certain investment products. Obviously, that creates a potential conflict of interest: those advisors have incentives to trade more frequently, and to recommend specific products in order to generate higher commissions for themselves and their firm, whether or not they’re best for you.

One way to avoid uncertainty – and the potential headaches it brings – is to work with a fee-only registered investment advisory firm (RIA). Fee-only RIAs and advisors do not earn commissions so they are not motivated by the frequency of trades, so they are less likely to encourage buying and selling unless it’s the best choice for you. Because RIAs are held to a fiduciary standard, they are legally bound to always – and only – act in your best interest.

Do your advisor’s feed include additional services?

Even if you are working with a fee-only RIA, however, you may be still not getting your full money’s worth. Many clients neglect to take advantage of untapped services that are included in their advisor’s fees, such as tax and estate planning, insurance advice, and financial coaching, among other services. If you’re not sure what additional services your advisor – or the advisors you are considering – provide, ask them. It’s the best way to ensure that there’s an open path of communication and that you are getting the most value out of your wealth management experience.

Only you can decide what kind of fee structure is best for you, what you feel is the appropriate amount to spend on investment management and financial planning, and what additional services are important to you to help you grow your wealth.

If you’re concerned you’re not getting your money’s worth, though, or that you’re paying too much, here are some good questions to ask yourself: How adequately served do you think you are? Are you confused with what services you are getting and what you are paying for? Do you feel valued? Are your goals being met and are you being listened to?

If you’re not satisfied with the answers to any of these questions, remember that you have options. Sherman Wealth Management is proud to be a fee-only independent RIA firm, because we feel it is the best way to meet our ethical standards and guarantee that all potential clients have a simple and cost-effective way to access investment management and financial planning.

Knowing what those options are, and getting clarity in your fee structures – whatever kind of advisor you ultimately choose – will allow you to feel more confident about the decisions you make, now and for your future.

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

 

 

 

 

 

 

 

 

 

Know the Difference between Fee-only vs. Fee-based Financial Advice?

Fee-Only Financial Planning

Confused about the difference between Fee-Only Financial Planning and Fee-Based planning? You’re not alone. Financial planning jargon can be daunting when you’re just getting started.

Understanding the difference between Fee-Only and Fee-Based, however, is important and could be the key to your long-term planning success.

What is Fee-Only Financial Planning?

Fee-Only financial planners are legally registered as investment advisors and have a fiduciary responsibility to you to create a plan in your best interest. Fee-only advisors cannot accept any compensation as a result of product sales. In other words, they can’t make a commission from specific investments they recommend you purchase. They are paid directly by you – and only by you – either through an hourly fee, a retainer fee, or an agreed-upon percentage of your assets that they manage.

As a result, in most cases, Fee-Only advisors have fewer conflicts of interest. They are more focused on your needs, rather than on selling you specific investments, since their compensation is not determined by sales volume or choice. A Fee-Only advisor will not try to steer you toward commissioned annuities; a Fee-Only planner’s advice must be completely free of attachment to financial products. The role of Fee-Only advisors is to only provide you advice that fits your current financial situation and your goals and therefore not recommend products and services that don’t support that goal and that are not the best choices for you.

What is Fee-Based Planning?

“Fee-Based” is a category the brokerage community has created to take advantage of the success – and attractiveness – of Fee-Only advising. Because the terms sound so similar, it’s easy to think they are similar, but there is a major difference between Fee-Based planning and Fee-Only planning.

In Fee-Based planning, the advisor is compensated with a set percentage of your assets instead of a retainer or a flat hourly fee. In addition to that percentage, Fee-based advisors can also accept commissions from financial products, annuities, and insurance products they sell you. Each time you purchase one of those products, their earnings increase.

This leads to a fundamental conflict of interest. Your advisor wants to earn as much as possible while you want someone to provide honest and trustworthy guidance.

If one fund offers advisors a significant commission and another one doesn’t but is better for you and your financial goals, how likely is it that the advisor will forego the opportunity to earn the commission by recommending the better fund?

That is why the legally-binding Fiduciary Rule that Fee-Only Advisors follow is so important: the definition of a fiduciary relationship is one based on trust.

How to Make Sure Your Advisor is Fee-Only

Before selecting an advisor, ask how and what their compensation plan looks like. Ask them to disclose what their compensation fees are in writing and whether or not they accept commissions. By choosing an advisor who provides Fee-Only services, you stand a greater chance of avoiding any conflicts of interests. Remember, Fee-Based advisors are obligated by their brokers or by specific deals to sell certain products. Fee-Only advisors are under no such requirements and have a legal, fiduciary, obligation to work for you, and you only.

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

 

 

 

 

Do You Need to Change Your Financial Advisor?

Financial Advisor

In his song “Real Friends” musician Kanye West raps, “Real friends. It’s not many of us. We smile at each other. But how many honest? Trust issues.” West wonders whether those around him are there because they really have his best interests at heart, or if they only care about him for his money.

Given recent developments in the financial advisory industry, many Millennials might be wondering the same thing about their financial advisor. The Department of Labor (DOL) will soon be enacting a new rule that requires all financial advisors handling a retirement account to abide by a fiduciary standard, which means always acting in the best interests of the client and not the advisor’s or corporation’s profits. It might be surprising, but that is currently not always the case. If your advisor is not a fiduciary, he or she may not be obligated to act only in your best interest. You can read more about the new rule and our take on the fiduciary obligation here.

Opponents of the rule, unsurprisingly the financial services industry’s lobbyists, who largely oppose the rule, point to a study saying that it will decrease access to financial advice for small investors since advisors “cannot figure out how to make money when working with them.” Without the fiduciary obligation, how do advisors currently profit from younger investors? Forbes recently published an article by the Morgan Stanley team where advisor T. Gregory Naples says that with Millennial clients he,

“starts them out in managed mutual funds until they reach $50,000. After that, he often switches them to more transparent and lower-cost stock and bond funds managed by institutional money managers.”

Breaking it Down

This is a huge admission. Let’s break down exactly what Naples is saying. Crucially, Naples admits that, until you hit $50,000 assets under management (AUM), he invests your money in more expensive, less efficient funds. Many of these “actively managed” funds, which try to beat the market’s returns, have higher costs because of labor and number of trades they execute. After this period, once your AUM gets to a point where Naples can more easily make money off of you through fees, he puts your money into more efficient places it should have been all along.

Later on, he mentions examples illustrating the power of compound interest, but neglects to mention that the unnecessary fees you are incurring from the inefficient funds he has invested your money into will eat away at the returns you get from the compound interest. This illustrates the folly of the argument that the fiduciary rule will drive young investors away. Young investors who are just starting out are, in fact, much better off being driven away from advisors with non-fiduciary practices like Naples. Entrusting your money to a non-fiduciary, traditional financial advisor as a young, new investor is like intentionally hitchhiking on a road known for having murderous truck drivers when there’s a much safer road nearby. (Read more about 6 Questions to Ask A Financial Advisor)

People naturally gravitate towards big firms with name recognition. But as the Naples quote demonstrates, these large, non-fiduciary firms may not always be the best option, particularly for young investors. What the back-and-forth over the DOL rule reveals is that non-fiduciary advisors often don’t even really want your money. Most seek accounts with higher balances. So why go where your money is not wanted?

 

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

4 Things You Can Learn From John Oliver About Retirement Planning

On his HBO show Last Week Tonight, comedian John Oliver recently turned the national spotlight on the wealth management and retirement planning industry. In light of a new Department of Labor rule requiring all financial advisors to act as fiduciaries for retirement accounts, in which we strongly believe, Oliver skewered the opaque tendencies of brokers and traditional financial advisors. He urges viewers to bring their business to a transparent fiduciary who has your best interest at heart.

Oliver’s segment serves an important purpose — many regular people who trust a traditional financial advisor with their money, or millennials who are just now beginning to think about retirement planning, simply don’t know the many ways the advisor could be robbing them of their hard-earned money. While not everyone is as clueless as the woman whom Oliver ridicules for asking CNBC host Suze Orman whether she should spend $4,000 to get an elf-spotting certification in Iceland, the many ways traditional financial advisors hurt their clients are often hidden unless the client does the digging themselves. With that in mind, here are four major takeaways from Oliver’s monologue.

1. Many financial advisors may not have your best interest at heart — but you can find one who does.

As Oliver notes, “financial advisor” is a vague term. Even so, many traditional financial advisors  are not fiduciaries, and instead operate on commission. (An advisor who is a fiduciary must always act in the best interests of you, the client.) This means they can execute trades and strategies that line their own pockets with little regard for your financial well-being. We believe that this is unacceptable; as a result, we operate as a fee-only fiduciary that does not receive any sort of commission. While some advisors make money by endorsing a particular investment or product to their clients, we are paid only by our clients.

2. The “active management” of many funds and advisors can destroy your capital.

As we’ve previously detailed in this blog, you shouldn’t expect to win with actively managed funds. Not only do these funds fail to outperform the market, but in doing so they also accrue massive fees due to the large amount of trades they are making. While compound interest grows your investment over time, interest isn’t the only thing that compounds — fees do as well. Oliver cites a study in which an index of stocks, selected by a cat throwing a ball at them, outperformed an actively managed fund overseen by experts. The cat earned returns of 7%, while the pros garnered only 3.5%. Oliver summarizes the situation succinctly: “If you stick around doing nothing while everyone else around you [messes] up, you’re going to win big.” At Sherman Wealth Management, we believe sticking with investments that focus on low cost and tax efficiency is the best way to save for the long term. ETFs are an investment vehicle that we utilize to accomplish this goal.

3. It doesn’t have to be this complicated, and it might be getting simpler.

There are easy steps you can take. Start saving now — it’s never too early. When screening financial advisors, ask if they are fiduciaries. With your money in the hands of a fiduciary who puts your best interest first, you can be confident in your advisor’s motivations. 

Feel like the little guy/girl who can’t get the time of day from your “financial advisor”? Read our post – Why Go Where Your Money’s Not Wanted?

4. These principles aren’t abstract — they have real consequences for real people, like you.

To demonstrate all of this, Oliver examined the 401k his own employees at HBO were using through their provider. The retirement fund charged 1.69% fees, and their broker refused to offer low-cost, low-fee plans. The advisor even messed up the calculations on the compounding interest, making his original math off by over $10,000,000. These are not the actions of someone who values his/her clients more than a paycheck; on the other hand, we value our partnership in our clients’ future success.

Where Oliver went wrong is when he questioned why anyone would invite their financial advisor to their wedding. We are proof that a relationship like that is possible between client and advisor. As a fiduciary, when we consistently act in the best interests of our clients, we end up building strong friendships with them.

At Sherman Wealth Management, we have long been at the forefront of the fiduciary movement for transparency and conflict-free advice. At a traditional insurance company or wire house, advisors will often recommend expensive funds produced by their institution; on the other hand, we can take a more holistic view of investments to determine which are best for you. We believe in growing with you, not at your expense.

We encourage you to trust your retirement to an advisor who will act only in your best interest. Curious what that looks like? Schedule a free portfolio analysis and strategy session with us.

Check out the full John Oliver video here.

 

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

6 Questions to Ask A Financial Advisor

6 Questions for Financial Advisor

Finding a financial advisor who is right for you is an important process. A good financial advisor is there to prevent you from making decisions that would have a negative, unintended impact on you. Who wouldn’t love to have a financial coach to keep you on track to achieve your financial goals?

Just like with any working relationship, it’s a good idea to interview advisors until you find the one who is the best fit for you, your life, and your financial goals. Since you are entrusting your financial well-being to someone, you should get to know them and their financial planning and investing philosophy before committing to a long-term relationship.

As you may have heard the Department of Labor (DOL) has just released its new fiduciary rule in its final form. We previously wrote about the reasons why someone would oppose this rule considering it was created to improve financial transparency and eliminate conflicted advice from advisors. While this rule would still allow advisors to keep their “conflicted” commissions in some instances, it would require advisors to act as fiduciaries (a.k.a. “best interests contract”) when handling client’s retirement accounts.

We have long been proponents of more transparency and conflict-free advice and feel this is a step in the right direction.

So how does this affect your search for the right financial advisor? Here are 6 questions to ask to help with finding a financial advisor.

1. Are You a Fiduciary? (Are You ALWAYS a Fiduciary?)

As we mentioned earlier, this new rule will only require financial advisors to act as a fiduciary for client’s retirement accounts. A fiduciary is regulated by federal law and must adhere to strict standards. They must act in the client’s best interest, in good faith, and they must provide full disclosure regarding fees, compensation, and any current or potential conflicts of interest.

Until now, broker-dealers, insurance salesman, bank and financial company representatives, and others were only required to follow a Suitability Standard. That means they only had to provide recommendations that are “suitable” for a client – based on age or aversion to risk for example – but this may or may not be in that client’s best interest.

The brokerage industry, as you can probably imagine, and all those who earn their compensation from commissions are strongly against these new rules.

Even with this new law passed, we feel it is important to make sure your advisor is acting as a fiduciary when dealing with ANY of your finances, not just retirement accounts.

 

2. What is Your Fee Structure? (Difference Between Fee-Only, Fee-Based and Commission)

Advisors throw out terms like “fee-based” and consumers assume that is the same as
“fee-only.” That is not the case. At Sherman Wealth Management, we are fee-only which means that we are paid exclusively by our clients, so we are completely conflict-free. We do not get commissions from the investments or products we recommend. We do not get bonuses based on how many clients we get to invest in company products. We are paid an hourly or quarterly fee by our clients who retain us because we are making their money work for them with only their best interest in mind.

Think of it this way: would you want to work with an accountant who also gets commissions from the IRS? Of course not. You want your accountant to represent your best interests. Would you go to a doctor who makes money each time he prescribes penicillin? No, you want your doctor to prescribe what is right for you.

Do not assume that an advisor is following a fiduciary standard with their compensation now. The new rules will not be enforced until 2018. Ask your financial advisor to clearly specify their fees. With many layers of diversification that can be applied to your portfolio, you want to be aware of whether you are exposed to up-front charges, back-end fees, expense ratios, and/or whether a percentage of your returns will be deducted.

 

3. Why Are They Right for YOU?

A financial advisor should be able to tell you their strengths and what sets them apart. Some advisors will advise on investments while others specialize in comprehensive financial planning. While you may think all advisors are the same, and it certainly may seem like that on the surface, by now you should be seeing that is not the case.

Ask how involved they are with their client’s portfolios. Are they hands-on in their approach? How available are they for their clients’ needs?

For us, we enjoy serving a wide-range of clients, from young first-timers who are just getting started with investing and financial planning, to experienced savers, to high-net-worth investors who are well on their way to financial independence.

We strive to understand our clients wants and needs. We help our clients plan for the long term while simultaneously working to avoid short-term roadblocks. We do so by making it a point to SHOW you that you are not alone. We’re just like you, we’ve been there, and we know that financial planning can be an anxiety provoking activity for many. We use a fluid process to help set clear, realistic goals with an easy to understand roadmap of what you need to do to get there. We are right there with you every step of the way.

In today’s world you don’t just want a trusted advisor, you want instant access to your accounts and the progress you are making. That is why we offer some of the best in new financial services technology tools.

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The relationship with your financial advisor is an important one. You need to feel comfortable with whom you are working with.

 

4. What is Your Investment Philosophy?

Every financial advisor has a specific approach to planning and investing. Some advisors prefer trying to time the market and actively manage funds versus passive investments. Others may seek to gain high returns and make riskier investments. Your goals and risk tolerance need to align with the advisor’s philosophy.

When anyone invests money, they are doing so with the hopes of growing it faster than inflation. While some traditional investment managers not only want to generate a profitable return, they aim to beat the market by taking advantage of pricing discrepancies and attempting to time the market and predict the future. Some investment companies offer “one-size-fits-all” investment management solutions that only take into account your age and income.

We have a different approach. We believe an individuals best chance at building wealth through the capital markets is to avoid common behavioral biases in the beginning and utilize a well thought out, disciplined, and long-term approach to investing. We create a well diversified, customized portfolio that focuses on tax efficiency, cost effectiveness, and risk management. Read more about how we do this.

Make it a top priority to understand the strategy your advisor uses and that you are comfortable with it.

 

5. How Personalized Are Your Recommendations for Your Clients?

It is important that your financial advisor tailors your financial plan to your specific goals. Your retirement plan and investment strategy should be customized to take into account your risk tolerance, age, income, net-worth, and other factors specific to your situation. There should not be a one-size-fits-all approach to managing your money.

Some traditional brokers and insurance companies are so big that it becomes impossible for them to give you a truly individualized experience. They have a corporate agenda that they must follow and it can restrict the service they provide to you.

As frustrating as the requirement for a high minimum balance is for first-time investors, it has also inspired a new breed of smaller independent Registered Investment Advisors (RIAs), like Sherman Wealth Management. What our clients all have in common is that they appreciate the focus on their own individual goals and best interests that we guarantee as a boutique, independent, fee-only fiduciary.

We know that each client is unique.  We don’t look for “market efficiencies” or work for sales commissions on the products we recommend. Our focus is different. We strive to help investors build a strong foundation and grow with them, not by profiting off good or bad trades. This gives us the opportunity to create individual strategies and plans that are uniquely suited to each client, not just a cookie-cutter plan based on age, income, or broadly assessed risk tolerance.

 

6. Do You Have Any Asset or Revenue Minimums?

Some have argued that the proposed DOL rule will end up hurting the small investor because larger institutions will not be willing to serve small accounts. This logic is fundamentally backward and flawed, as those clients were never on their radar to begin with. In fact, the ability for these large institutions to generate commissions and thus charge more to these small investor clients have driven that business, without regard to the best interests of the individual investor.

For example, In a company statement quoted by Janet Levaux in Think Advisor, Wells Fargo, the most valuable financial institution in the world according to the Wall Street Journal, said that in 2016, “bonuses will be awarded to FAs with 75% of their client households at $250,000.”

Wells Fargo isn’t the only large institution effectively ignoring Millennials and other smaller and entry-level clients. Most of the corporate institutions prefer high-net-worth clients because it creates “efficiencies of scale” and a higher profit margin on larger trades.

The complaints against the new DOL rule have nothing to do with protecting the little guy. Rather, the complaints are driven by the desire of commission-based large institutions, insurance companies, and broker-dealers who are trying to protect their ability to generate commissions and charge clients unnecessary fees.

Make sure you understand your advisor’s motivations. If they don’t want you, why should you want them?

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.