Do you know the answers to these questions?
- What is a variable annuity and should you have one?
- How much money do you need to retire?
- Do you need life insurance and, if so, how much? Term or whole life?
- What's the cost of your 401(k) plan? Or your mutual funds?
- What's the best 529 plan for your children or grandchildren?
Financial planners are professionals trained to provide answers to these questions and many more. Often, the savings from even one piece of advice from a financial planner -- if followed -- will more than cover her fee. But most people don't want to spend the money and feel that they can do it themselves, despite investments and financial planning not being their day job.
Earlier this year, Ron Lieber of The New York Times reported that LearnVest, a financial planning start up had thrown in the towel. After spending $75 million of venture capital money, it had only 10,000 customers signed up. They paid a mere $299 start up fee and $19 a month for continuing services. LearnVest is still serving customers but is now owned by Northwest Mutual, the insurance company.
He reports further that when the 5,300 claimants to the September 11th compensation fund were offered free financial services by prominent financial firms, only 78 people took them up on the offer. So it's not just the cost that's the deterrent. I think it's the result of our complicated feelings about money. We feel we should know what we're doing with it. We don't know what we don't know about the financial world. And there's often a feeling of shame if we're not making or saving as much as we think we should. The result is that we're easy picking for people and companies trying to make a buck (actually lots of bucks) in the financial world.
There have traditionally been four ways to get financial advice:
- Stock Pickers. This was the traditional broker who would call you with a hot tip or general advice on purchasing stock. He (it was usually a guy) and his company would make money on commissions on stock trades. This role has, fortunately, mostly gone by the wayside with the advent of low-cost stock trading.
- Funds Under Management. Most financial planners now charge a fee based on the amount of funds for which they are responsible, often 1% per year. The theory is that their interests are aligned with yours since everyone benefits by the value of your investments increasing. While financial planners following this model are not technically responsible for funds they are not managing, they will typically work with you on your entire financial situation.
- Commissions. Financial planners selling products such as life and long-term care insurance or annuities, earn commissions on products they sell. This structure has the advantage of the customer not paying anything out of pocket, but the disadvantage the the insurance broker only makes money if the client buys a policy. While insurance products provide important protections and often make total sense to purchase, the broker's and the client's interests are not aligned. It's difficult for the client to know whether the broker is providing good advice or simply trying to sell a product.
- Fee only. Fee-only financial planners charge an hourly or fixed-rate fee for their financial analysis and advice. Unfortunately, clients often find it difficult to write the check out for these services even though this is often the least expensive approach and it avoids any conflict of interest.
Some financial planners combine one or more of these models, for instances charging a fee for financial planning as well as collecting commissions for any insurance purchased. Or charging an initial planning fee for a new client, but dispensing with the fee for future planning if the client then engages the planner through the assets under management approach.
All of these financial planning models involve a one-on-one relationship between the client and the planner. They need to get to know one another so that the planner can provide appropriate advice and the client can trust the planner. This could be the Achilles heel of LearnVest and other on-line financial services. Clients may need the personal touch. On the other hand, if shame is an obstacle to potential clients seeking assistance, many people may feel more comfortable with more anonymous on-line services.
Lieber reports that what finally prompted him -- a well-informed financial journalist -- to engage a financial planner was lack of time. While he might have known what planning steps he needed to take, he never got around to implementing them.
There are many financial planning sites on-line in addition to LearnVest. I'll mention three here:
- Mint.com links up to all of your accounts to provide a complete picture of your financial situation.
- E$planner.com created by Boston University economics professor Laurence Kotlikoff to provide financial planning advice.
- Wealthfront.com invests your assets at a low percentage fee based on the best thinking of its investment advisors.
For complete financial planning -- control of your assets, guidance on what steps to take, and investment management -- you might want to use all three sites. But, of course, there's still the problem of implementation.