Don't Pay Too Much for Financial Advice!

Last Updated May 12, 2010 9:43 AM EDT

You must pay for good financial and investment advice--nothing is free. In fact, "free" financial advice is often very costly; you'll find such advice at free dinners or seminars offered by people who want to sell you investments or insurance. My advice? Don't go!

Understand what you're getting yourself into before you pay. Here are three common ways to pay for investment advice and my thoughts on each:

An upfront sales charge or commission which can range from 2 percent to 6 percent per transaction. For a $100,000 investment, for instance, the fee can range from $2,000 to $6,000. This is my least favorite way to pay for advice, since the advisor may be motivated to churn your account to continuously earn commissions, or recommend products that pay the highest commissions.

A percentage of assets under management. A charge of 1 percent per year is typical. This is better than the first option since your advisor should be unbiased in buying and selling investments. One percent sounds like a small number, but the costs can certainly add up over time. Let's do the math so see why I say this. Suppose you have $400,000 in retirement investments; in this case, you'd pay about $4,000 per year. And after 10 years, you've paid $40,000. If you're retired for 20 years, which is certainly possible, you've paid $80,000. These examples are simplified to make a point; in reality, your $400,000 of retirement savings would increase or decrease depending on your investment results and strategy for withdrawing from savings.

Do you really need to pay one percent, year after year? A sound financial plan should be good for a period of several years, and should not need a continual high level of attention.

In addition, advisors who charge a percent of assets may not be totally unbiased. For example, they may not be too keen on buying an immediate annuity, since the money you spend on an annuity doesn't count as assets under management. Or they may advise you to take a lump sum from a pension plan, since that can increase their assets under management. Or they may not like buying long-term care insurance, because they might prefer that you self-insure this risk by investing with them.

A flat fee or hourly rate. Flat fees can range anywhere from $500 to $2,000, while hourly rates usually range from $150 to $300. This is my favorite method of paying for investment and financial advice. If you decide to go this route, work with a planner who'll give you a program that should work for several years. Then you control when to pay for periodic checkups, in case your situation changes, if there's an economic downturn that requires some attention or hand-holding, or to make sure your plan is up-to-date.

Note that this form of paying for advice puts some responsibility on you to pay attention to investments and the economy. You could deal with this issue by scheduling periodic conference calls, say annually or when your situation has changed, to see if there are issues that require a further look. This will certainly cost you less than one percent of assets.

One network of financial planners that charges using hourly rates is the Garrett Planning Network.

No matter whom you're thinking of working with, I advise you to do your homework and apply your common sense. Certainly there are reputable, trustworthy financial advisors out there who use one of the first two methods of compensation for financial advice. However, I believe you'll increase your odds of success by working with trained professionals whose compensation aligns with your financial interests.
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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