Friday, September 9, 2016

Why Oregon conservators should be using fee-only financial advisers.



I have gotten some pushback from professional fiduciaries about my advocacy of index funds when investing money belonging to the disabled. The complaint is that the professional fiduciaries have too much to do already. They can't be expected to understand the intricacies of investment, diversification, risk, and the prudent investor rule. Thus, they should be allowed to contract out that aspect of the job to experts.

It is a good point, but not a great point. I don't think the job is that difficult these days if one was a rudimentary understanding of money and math, but I am a nerd and it may be unfair to expect others to share my interests.

However, professional fiduciaries who hire financial advisers to help manage the money of the disabled are required each year to disclose the amount paid to these advisers. No professional fiduciary wants to have that disclosure be an embarrassment.

Disclosing how much is paid to most commission-based financial adviser is not easy. The fee is not listed anywhere in those thick quarterly statements that many brokerages send their clients. In dealing with one national brokerage I have had to write a separate form for the agent to fill in  the amount of his firm's fees. I was always shocked by how high it was.

I think the solution to both the disclosure problem and the excessive fee problem lies in Oregon conservators hiring "fee only" financial advisers who charge either by the hour or the project. (Avoid paying a percentage of the assets managed unless this works out to rate under $200 per hour). These guys and gals get paid directly by the person who is hiring them. The money comes from the client, not from the manager of the product they recommend. They are not influenced by the commission associated with the product because there is no commission. Because the fiduciary will be writing the check for the fee, it will be easy to make that disclosure at the end of the year. And in most cases, the fee itself is going to be lower than the fee paid to commissioned agents.

Fee only financial advisers often advertise at the Fee Only Network website. Portland fee only advisers can be found here.
By selecting a fee only adviser, Oregon conservators can assure that their clients investments are not being skewered by the commission associated with the investment and that they will have a comprehensible statement of fees to present to the court.

Now, I happen to think that a fee only adviser will often suggest the safety and predictability of index funds for disabled clients. If, however, I am wrong and the independent adviser suggests a fund with a three percent cost ratio, at the very least the conservator has the safety of being able to tell the court that the investment advice was not influenced the commission the adviser got from the sale.

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