Independent Financial Advisors or Not? My Interview with 4 Advisors
Are you better off getting an independent financial advisor rather than someone working for a major “wireline house”? There’s been a lot of legal wranglings going on between the indepent financial advisors and so called “financial advisors” from broker-dealers.
Traditionally, independent financial advisors provided a financial plans on a fee basis. Execution of putting together a portfolio is left to another broker dealer. In this instance, the independent financial advisor is a registered investment representative and has fiduciary responsibility for his or her clients. A registered investment representative can also be a registered broker dealer meaning that he can execute trades (eg a portfolio of mutual funds) for his or clients as well.
Independent financial advisors who charge a fee for financial plan and call themselves “fee only” advisors claim their way of conducting business is the best because they have no conflict of interest because they do not represent any brokerage houses and any inhouse products. Independent financial advisors also claim that being registered investment representatives, they are held to a standard of a fiduciary. Brokers Dealers (ie traditional stock brokers) are not held to a fiduciary standard. But instead, when you deal with a broker dealer, you understand that he or she may recommend products because it may benefit them in terms of commissions.
However, nowadays, the lines are very blurred. Insurance agents now also provide financial plans and call themselves financial planners. All major brokerages hire financial advisors and also provide financial plans to clients as well. The independent financial advisors are not happy about this because ‘financial planners’ from insurance companies or brokerages are not held to a fiduciary standard. But once again, the lines are not that clear cut. Brokerages have different ‘platforms’ for their clients and some of these platforms are advisory in nature. That means that when a financial advisor from a major wire house puts a client into an advisory platform, they are essentially assuming the role of an investment advisor. Independent financial advisors claim that advisors from wirehouses cannot be objective because they would push their own ‘in-house’ products. However, that argument is becoming irrelevant as well as while many wirehouses have their own products from their own asset management division, they have offer tons of other funds and products from every many investment firms.
But does the argument that independent financial advisors offer better and more objecgtive advice hold true? Well, recently, I decided to interview a few financial advisors. The first was someone from Ameriprise (formerly American Express). They are supposed to have the largest network of financial advisors in the country. They charge a fee for a financial plan. The second advisor I interviewed was from Morgan Stanley. I then interviewed by CPA! and lastly Salomon Smith Barney. This was how it went.
Ameriprise : Fee was the big issue for me here. I actually had to put up an upfront fee. Actually, this was the second person from Ameriprise I spoke to. The first wanted to charge me $1,500 for a financial plan. I felt this was an outrageous fee. I called his bluff and said no way. I met another advisor from Ameriprise who was willing to charge me $250. We went through the usual interview where he digged into my financials, asked me about my retirement goals, filled in a questionaire. After about two weeks, we met again for a presentation. We went through a summary of networth, how much I had to save to hit my retirement goals. We also went through my insurance converage and it turns out that I was adequately covered. Finally, it got down to what I should do with my portfolio. I was recommended a growth portfolio. He recommended me a portfolio of index mutual funds from Vanguard only. He claimed that because most mutual funds do not beat the market index, indexing was the best way to go.
Morgan Stanley Dean Witter : My meeting with this person was a little strange. We did not do any proper financial plan. In fact, he did not bother about my assets in my retirement account or my 529 account. Instead, all he was concerned about was the performance in my non-retirement or taxable account. In our second meeting, he had a five page proposal on what funds he will put me into. This person’s pitch was more of performance. He showed me the history of the funds he was recommending (which looked impressive). Having said all that, I was not too impressed.
My CPA : Yes, the third person I interviewed was my CPA, who was also a CFA. He was very thorough and did a proper financial plan. We went through my networth, how much I needed to save, how much I need to save for my kid’s 529 plan, and also proposed an asset allocation for me. He recommended allocating to large cap and small cap stocks and bonds. He also gave me two alternative investment vehicles. Firstly, he showed me a portfolio of mutual funds A share class. For almost all of these A shares, I had to pay an upfront fee of anywhere from 3% to 5.25%. He explained to me that a having A shares was better than class C shares, which though has no upfront fee, but a higher annual fee (including higher 12b-1 fees). He mentioned that if I held A shares long enough, it would be cheaper than C shares in the long run. He also offered me a choice of a managed account. A managed account differs from mutual funds in that the stocks and bonds that the individual managers are actually owned by you and you see them in your statements. The individual managers in various asset classes are chosen by a team of ‘overlay managers’. By the way, I was charged $500 for this plan.
Salomon Smith Barney : My last interview was with a financial advisor from Salomon Smith Barney. We did a financial plan. At the second meeting, we went through the findings of the plan. He told me how much I needed to save for retirement, how much I needed to save for my kids education. He also told me analyzed my insurance needs (same findings as Ameriprise – I’m am adequately insured). But this person also talked about estate plannning and unified credit provisions (hmm – I was impressed). Then, it came to my investment proposals. After going through my objectives and risk tolerance levels, he also recommended a growth portfolio (about 65% equities and 35% fixed income). Before he went to the actual investments, he explained how he was going to allocated my portfolio. He said there will be international equities and REITs in the equity portion. In the equity portion, there will be large cap growth and value, mid and small cap growth and value. He also explained how the bond portfolio will be diversified across maturities and the different types of bonds (like government bonds, agencies, mortgages, corporate bonds, international bonds etc).
Like my CPA, he tabled two proposals – mutual funds and seperately managed accounts. He strongly recommended the seperately managed account because it gives you some leeway to harvest tax losses. He also said the money managers in a seperate managed accounts are institutional money managers who manage money for larger institutions (not your morning star funds). Both the mutual fund portfolio and the seperately managed accounts will be in a wrap account where I would pay roughly about 1.25% fees based on assets. For the mutual fund portfolio, I still had to pay the fees for the mutual funds. Hence, the seperately managed account was more cost effective. Furthermore, both platforms had automatic rebalancing and he explained why rebalancing reduces portfolio risk and volatility.
Who was I impressed with? – Well, let’s go through each financial advisors one by one. The Ameriprise guy was OK (at least i felt that way) at first. But after I had met with these four people, he seemed the least knowledeable. All he could recommend was the index mutual funds. The person from Morgan Stanley appeared only to be after my money to manage. My CPA was actually good. But at the end, I was most impressed by the guy at Salomon Smith Barney. He was professional and knew his stuff. He explained to why my portfolio was constructed the way it was and I felt at ease with him. He also talked to me a lot about estate planning and I think that made him stand out among the crowd.
Bear in mind that you can consider the person from Ameriprise as an independent fee only financial advisor. They only charge on the plans and because the person that I spoke to only did plans, I felt his knowledge of actual asset allocation and how to build a portfolio to be weak compared to the others. My CPA was also a fee based advisor and he was quite good. But, like I just mentioned, I liked the person from Salomon best.
So when it comes down to it, I think it is the individual person and financial advisor, rather than whether they are independent or not, fee only not. As the Ameriprise person demonstated, fee only does not equate to being a good advisor.
I think I will go with the guy from Salomon.
