You Get What You Pay for, and Pay for What You Get

Nobody likes paying for something he believes he can do himself. Nobody likes paying for something if she can never be sure if she is getting her money's worth.

Nobody likes paying for something when he can't see exactly what the provider has done to earn so much.

And, thus, nobody likes paying for financial advice.

But unless you are sufficiently qualified and dedicated to do this yourself, you will have to pay someone to assist you in reaching your financial goals. I've heard plenty of people brag about how much money they save doing key financial chores on their own -- and I am all in favor of getting things cheaply and paying no more than is necessary -- but I have seldom heard those same people boast about the results.

Indeed, for most consumers, the ideal financial plan (or insurance, tax, or estate plan) has three qualities: It is cheap, easy, and successful.
You can get all of those things in your financial relationships, but almost never more than two of them at any one time. And make no mistake about it, costs matter; investment returns are never guaranteed, but your laying out money to pay for help -- no matter what return you actually get -- is a foregone conclusion.

That being the case, costs -- and the ways you pay -- will always be a central issue in your relationship with an advisor.

There's nothing inherently wrong with paying for financial help -- advisors of all stripes need to eat too -- so long as you know what you are getting, how you are paying, and can be confident that those charges are reasonable for the services you are receiving.

If you are hoping I'd give you a dollar amount, forget it; it's just not that easy. Some advice is too costly, at any price. Somewhere between managing money on the cheap and paying through the nose lies the ideal payment structure for the average consumer. Moreover, the range of costs can be huge, depending on everything from an advisor's experience and credentials to the region where you live.

Smart Investor Tip

There's nothing inherently wrong with paying for financial help so long as you know what you are getting, how you are paying, and can be confident that those charges are reasonable for the service you are receiving.

There are several ways to pay for financial help. Bankers typically are not paid directly for their efforts but have their pay built into loans and other basic services. Bank advisors, however, may work on a commission basis if they are dispensing more sophisticated advice. Tax preparers, by comparison, work almost entirely on a fee-for-service basis, getting paid either for time spent preparing a return or by the form, by which each completed piece of paperwork is worth a set price.

Most real estate agents work entirely on commission, while brokers, financial planners, and insurance agents can be paid in several ways, from commissions to a fee based on a percentage of the money they manage for you, to a flat hourly fee. Some hybrid payment structures, such as "fee offset," combine flat payments with commissions.

And some fee structures are hidden, making it feel like you are getting the services of the advisor for free when, in fact, you are paying for his or her services through higher ongoing investment expenses, such as the heightened costs from owning C-class shares of a mutual fund or the insurance premiums that go largely to an advisor during the first few years of some policy contracts.

One way or the other, you are paying the freight here; that being the case, you must know how and what you are being charged. Many financial services customers are afraid to ask up front, because they fear the "If you have to ask, you can't afford me" attitude.

To heck with that: If the advisor isn't willing to discuss his compensation with you up front, the relationship is doomed before it starts, so fire away with your questions and listen closely to the answers. Remember, cost concerns are one of the key reasons why customers wind up disappointed by their advisor, so making sure it won't be a problem for you is critical to having a successful advisory relationship.

Don't Be Fooled by an Advisor's Minimum

One of the biggest misconceptions in the advisory world is that the counselors who work with big-money clients must be good. I can't tell you the number of people who have used an advisor's minimum asset requirements as a selling point, as in "He only works with clients who have a million dollars, so he must be good."

Ironically, these same people often feel honored that the advisor has waived the minimum for them, which actually proves that the advisor does not limit the practice only to top-dollar clients.

Account minimums -- the smallest amount of assets a consumer needs to work with an advisor -- are not so much a badge of honor or some type of accomplishment as they are a way of valuing time. There's not a great advisor alive today who started with a million-dollar minimum. In fact, top advisors will regale you with stories of hustling for clients and scraping along trying to get almost anyone interested, and how they have customers who joined them at the beginning of their practice who -- like their practice itself -- have grown from no assets to be wealthy over time.

Account minimums are actually about the advisor's available time. Say a good advisor can service 250 clients and truly provide the kind of service she thinks will benefit her customers. It takes nearly as much time to service a client with $50,000 or $100,000 as someone with $1 million, but they are making one-tenth or one-twentieth the asset-management fees or commissions.

Thus, there comes a point where it is only worth the advisor's time if his next client can be expected to deliver a certain minimum amount in fees. If he charges 1 percent of assets under management and he has a $250,000 account minimum, he is saying that he does not want to take on clients who will fail to generate at least $2,500 in revenues for the practice. The more successful the advisor becomes, the more valuable his or her time, the more the minimum rises.

High minimums are a misdirection play, getting you to take your eye off the ball, which is the advisor's ability to help you reach their financial goals. There are plenty of advisors with million-dollar or $5 million account requirements simply because they have been around for a long time, not because they are great stock pickers, money managers, or investment strategists.

What's more, if you are the smallest client of a big advisor, how can you expect to get the best that the counselor has to offer? It's a fair question; if you had a client whose business brings in $10,000 minimum per year (1 percent of a $1 million under management) and another who brings in $2,500, who do you think would command more attention?

That's why you shouldn't be impressed by an advisor's high- net-worth customers, nor should you feel blessed that someone is letting you into her exclusive club, even if you don't really have the assets to belong; that kind of thinking is precisely what swayed many people to let their guard down and give money to Bernie Madoff.

Remember, the next great advisor is out there looking for a client like you, and she will treasure your money and not treat it like an afterthought to her thriving practice.

By Chuck Jaffe
Chuck Jaffe is a senior columnist and host of two weekly podcasts at MarkWatch. He has also been a guest speaker on several television and radio shows.

Copyrighted 2016. Content published with author's permission.

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