|
Why Use a Fee-Only Financial Planner?
- Fee-Only financial planning makes it easier to evaluate your overall financial situation in an objective manner, including areas such as retirement projections, education funding, asset allocation, insurance coverage, and estate planning. In contrast, transaction-based approaches can lead to neglect of planning areas that are not associated with a particular transaction or product.
- The products recommended in a transaction-based approach may be those that generate the largest commission, rather than those that are best for you.
Why Use a Fee-Only Financial Planner for Investment Advice?
- With regard to investments, Fee-Only financial planning separates the advice cost from the transaction cost, thereby providing more complete disclosure and more flexibility for you.
- The approach to investing is holistic, and encourages consideration of any particular investment decision in light of:
- Its relation to your other investments and your financial goals, and
- Its effect on your tax situation.
- The evaluation of investments need not be limited only to a particular set of assets under management or in a particular account, and assets in a particular account need not be considered in isolation.
- Many people implement their investment plans using mutual funds. A Fee-Only financial planner does not get compensated for the sale of a particular mutual fund. Hourly, Fee-Only advisors are compensated for the amount of time they spend to evaluate your situation and prepare the investment recommendations. You implement the recommendations by using a discount broker, or by direct purchase through the individual mutual fund company. There may be no transaction fee if you purchase directly from the mutual fund or if you use a discount broker. The advantage of using a discount broker is that you can consolidate your assets in one place and reduce the number of statements and year-end 1099 tax forms you receive.
- Full-service brokers obtain their compensation from the sale of the mutual fund, and there are different “share classes” with different commission structures. The two main classes are:
Class A: In this class, an up-front commission of typically between 3.5 and 5 percent of the purchase price is charged. There is no charge for a sale, and usually there is no charge to switch between funds in the same “fund family”. In addition to the normal management fee of the mutual fund, there is often a “12b-1 fee”, which covers the marketing and distribution of the fund. The broker may sometimes get a portion of this as part of his compensation. For Class A funds, the 12b-1 fee is typically on the order of 0.25 percent of assets annually.
Class B: In this class, there is no up-front commission. But there is a deferred charge that declines over time. Typically, the deferred charge is 6 percent the first year, 5 percent the second, and so forth. There is also a considerably higher 12b-1 fee, typically on the order of 0.75 percent of the value annually. If held long enough, Class B shares sometimes convert to Class A shares, and the 12b-1 fee is reduced to the level associated with the Class A shares.
To see the costs associated with Class A and B shares, take a look at the table below for different investment amounts:
|
Amount of Assets |
Class A Sales Commission
@ 4 Percent |
Class A Annual 12b-1 Fee
@ 0.25% |
Additional Class B Annual 12b-1 Fee @ 0.5% |
|
$50,000 |
$2,000 |
$125 |
$250 |
|
$100,000 |
$4,000 |
$250 |
$500 |
|
$250,000 |
$10,000 |
$625 |
$1,250 |
|
$500,000 |
$20,000 |
$1,250 |
$2,500 |
|
$1,000,000 |
$40,000 |
$2,500 |
$5,000 |
Recall that the Class B funds also have a deferred sales charge depending on how long you hold the fund. Again, this may be waived if you stay within the fund family, but the trouble is that a fund family may not have strong performing funds in all categories. With a Fee-Only approach a suitable fund for each category can be chosen without regard to what fund family it is in.
Fee-Only advisors often use “no load” funds. These typically have no 12b-1 fee, but may have a fee on the order of 0.25 percent. This fee typically goes to the discount broker as compensation for the administrative costs of handling the mutual fund through their mutual fund network. The Fee-Only advisor does not obtain any compensation from this.
|