So you’ve figured it out: You NEED a financial advisor. But you’ve taken it one very big step further: You’ve decided the advisor needs to be a Fee-Only Registered Investment Advisor (RIA).
OK, so maybe you’re not quite there yet, and are kicking the tires as to what you may be seeking. Let’s explore why these distinctions are so important before we get to some money saving techniques.
And, yes, we’ll get to the money saving techniques because after all, the fees you pay add up quickly. Not to mention just simply being aware of the number of advisors who overcharge for their services.
First off, a professional who is an RIA deserves your attention visa vie that of another advisor that calls themselves a financial planner or financial advisor. When you sign a contract with an RIA for professional advice, you’re engaging with that individual as a Fiduciary.
The fiduciary relationship is why you should actually pay MORE for an RIA, versus that of one who holds themselves out there as a planner or financial advisor. But alas, cost cutting techniques still to come!
Let’s dive a little deeper here…
Fiduciary…BIG WORD, BIG IMPLICATIONS. Let’s look closely at the difference between a fiduciary and a non-fiduciary relationship.
A Fiduciary MUST act in your best interests at all times, PERIOD.
A planner/advisor not acting in this capacity, well…they can do and sell you what they wish – whether it’s what they would sell their mother, sister, self or NOT.
Choose a fiduciary: CHECK.
Fee-Only…confusing term, IMPORTANT IMPLICATIONS. A Fee-Only advisor is an advisor that is disallowed from selling you something. Refreshing, right? NOT being SOLD something?
So basically, a Fee-Only advisor will pose no conflicts of interest when they advise you to implement certain products or strategies as part of your overall Plan.
Looking for a Fee-Only advisor in your area? NAPFA (National Association of Personal Financial Advisors), the leading Fee-Only professional association, is the go-to “watch dog” of Fee-Only advisors. They vet advisors holding themselves out there as Fee-Only to ensure, well, lets just call it quality control. The financial advisor industry has had a boom in the number of advisors over the last 2 decades, so quality control is very good thing.
Not all Fee-Only planners will be a good fit for you, so make sure you kick the tires and find an advisor that has the right chemistry, fees and experience for your liking.
NAPFA defines a Fee-Only planner as “one who, in all circumstances, is compensated solely by the client, with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. A NAPFA member or affiliate may not receive commissions, rebates, finder’s fees, bonuses or any form of compensation from others as a result of a client’s implementation of the individual’s planning recommendations.”
So, let’s wrap up what you need, and then let’s get to the nitty gritty of saving money.
Hire a Fee-Only RIA who will act as a fiduciary. Got it?
Now here’s how to save money along the way:
There are 2 areas where you can strategize to cut costs: planning fees and
investment (management) fees.
1. (Planning): Ask the advisor if there are parts of their planning contract that you can do yourself to save THEIR time, and YOUR money. For example: Can you download your budget and submit to them, versus them doing the grunt work?
2. (Planning): Some advisors are willing to discount their planning contract – as much as 50% of planning fee – IF you have them also manage their investments.
3. (Investments): DO NOT pay more than a 1% investment management fee, PERIOD. Your fee should be closer to .50-.9% per year for an ACTIVE management advisor. If your advisor subscribes to a Buy and Hold strategy and charges you annually for this, find someone else or go to Vanguard and eliminate the advisor fee and manage it yourself. If managing it yourself is not your cup of tea, find an advisor who subscribes to active management.
4. (Investments): Make sure the underlying securities in your portfolio aren’t charging you too much either. Whether you or your advisor is picking what goes in your investment account, make sure the overall expense ratio of your portfolio is well under 1%, too. An egregious example: You could own SPY, an ETF that tracks the S&P 500 that will cost you .09% per year, or your advisor may offer to buy you RYSOX, and S&P 500 fund that will charge a 4.75% up front commission to the advisor and an annual cost of 1.57% – on an INDEX FUND! So be careful about investment selection, and make sure you feel your advisor is fee-conscious when it comes to buying mutual funds (you really can do without these!)
Here’s the S&P 500 example, just in case you feel I haven’t shared enough in the way of saving money:
- $10,000 in SPY 2006-today would grow to $18,849
- $10,000 in RYSOX same time period would grow to $16,593
A staggering difference of 12%, or $2,256! That’s saving money – an extreme and unfortunate example, but a true one, nonetheless.
All of this difference due to up-front sales charges, which you won’t have with a Fee-Only advisor, and increased annual expenses from the actual security/investment choice (SPY vs. RYSOX).
Above all, go RIA, go Fee-Only, and ask every question you can to cut your annual investment fees and expenses. Finding the right advisor who is looking out for your best interest will save you boat loads of money in the long run.
What other money savings methods are out there? Let me know in the comments below!