Beginning a Career
Q: I’m just starting out in my career. I put money monthly into a 401(k), but what else should I be doing?

Roger Wohlner: Funding your 401(k) is a great start. You should also look to build up an emergency fund so that you won’t need to tap into your 401(k) or other investments down the road for those major expenses that tend to pop up when you least expect them.

Choosing the Right Advisor
Q: How do I know if an investment advisor is a good choice?

RW: Hopefully, you will not find my answer too biased. I am a fee-only advisor, and I feel this should be the choice of most people seeking the help of an advisor. Fee-only advisors are not paid based upon the sale of investment products but rather for the advice they render.

Helping Retirement-age Parents Make Savings Decisions
Q: I’m concerned about my parents’ retirement fund. They’re close to retirement, but I don’t think they have enough saved. I don’t want to be on the hook for them. I love them, but how can I help them out with so little time left to save?

RW: Good question, and one that is all too common today. The first thing to do is to sit down with them or have them sit down with a financial planner who can take an objective look at their situation. You and they might not like the answer, but at least you will have a realistic view of their situation, and you can use this as a basis to take action.

Handling Finances as a Newlywed
Q: I’m a newlywed. Should I be combining everything with my husband or keeping things separate?

RW: This is a great question. Arguments can be made both ways. Whether you combine accounts or not, you should think jointly in terms of your financial goals and where you are heading as a couple, financially. The worst thing you can do is to not be aware of what your spouse is doing financially and vice versa.

Saving for Future Children
Q: We’re in our 20s. We’re both employed, but I know I’ll be home taking care of kids one day. How much do we have to save in gross terms? Or how much should we save?

RW: Assuming that college is a goal, let’s say a lot. Currently, Northwestern University is about $55,000 per year, and Illinois State is in the mid $20,000s. I assume a 7.5 percent inflation rate in college planning. That said, save what you can (for both college and retirement) within your budget. Try to increase these amounts each year if you can.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

Read More:
The Real Cost of “Free” Financial Advice
Why You Might Need Life Insurance at Retirement
Investing Tips for All Ages: 401(k) Investment Strategies
How Rising Oil and Gas Prices Might Affect Your Portfolio
Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
Should You Use Retirement Savings to Pay Off Debt?

It is very common for me to see a new client with a number of old 401(k) accounts held by various former employers. Many people don’t know what to do with the accounts when they leave a job, but you actually have several options, including the three listed below:

1. Leave the account with your old employer. If your balance is at least $5,000, you are entitled to do this, and your former company must allow it. If your balance is below $5,000, your employer is not obligated to let you leave your money in the plan. Your best bet is to contact your old employer’s plan administrator to learn what options you have upon terminating employment.

Why might you leave your 401(k) with your former employer?

• The plan you are leaving has a number of solid, low-cost investment options, and the overall plan fees are reasonable.
• You are considering rolling your balance over to a new employer’s plan at some point. You must not comingle an old 401(k) balance with any other retirement funds if you want to roll it over to a new plan. Leaving your account intact at an old employer is one method that will let you leave your options open.

2. Roll the balance into an IRA account. You are free to roll your 401(k) balances (and balances of most other plans) to an IRA at a mutual fund company, bank, brokerage firm, and so on. Assuming you want to retain the tax-deferred nature of the account, be sure to do a trustee-to-trustee transfer. This means a distribution is not made to you, but rather it is made to the new custodian of the account. If you do take a distribution, your employer is obligated to withhold 20 percent federal tax. If you then decide you would like to roll the money over to an IRA, you have 60 days and you must come up with the 20 percent that was withheld in order to preserve the full tax-deferral of the account.

Why would you want to roll your 401(k) into an IRA?

• The investment options in your former employer’s plan are so-so at best.
• The IRA will provide greater flexibility in the investment choices available.

Please note that if your desire is to ultimately roll your old 401(k) balance into a plan at your new employer, you can still roll your old plan into an IRA. However, you need to ensure these dollars and any earnings from them remain completely separate from any other money. If the funds are “tainted,” then you lose the ability to roll them into a new 401(k) plan.

3. Tax considerations for your 401(k)All contributions made with pre-tax dollars (income on which you have never been taxed) are subject to taxation at ordinary income tax rates upon withdrawal. In addition, if you are under 59 ½ and do not meet the specific exceptions to this rule, your withdrawal will be subject to an additional 10 percent penalty upon withdrawal from your retirement plan.

Other retirement account considerations

• Company retirement accounts offer a high degree of protection from creditors. In most states, IRAs have similar protections. If asset protection is an issue for you, please consult with an expert in this area.
• If your 401(k) account is a Roth account, it is eligible to be rolled into a Roth IRA.
• A non-Roth retirement account will need to first be rolled to a traditional IRA and then converted to a Roth IRA. This is a taxable event.
• If your account is a mix of pre-tax and post-tax contributions, you will need to quantify these amounts. Consult the custodian on the rollover IRA and your financial advisor for assistance here.

This is not an exhaustive list. Dealing with a retirement plan account from an old employer is complex. If you are in this situation, this is an excellent time to engage the services of a qualified financial advisor. If you choose to go it alone, make sure you do your research and know the rules.

When I work with a new client in my financial planning practice, I often come across a condition that I call “financial clutter.” This has many forms, but a common version might look like this:

• Husband and wife have worked at several jobs and have a number of 401(k) plans left with their former employers.
• Three Roth IRA accounts are held with various custodians.
• Four Traditional IRA accounts are scattered among several custodians.
• The husband and wife each have a 401(k) account at a current employer.
• There are two taxable brokerage accounts, an annuity, and two accounts directly held via mutual fund companies, each with a single fund holding.
• Overall, there are 53 distinct holdings among these accounts.

What’s wrong with this picture? In my experience:

• Typically, clients with this type of profile have not looked at their holdings as an overall portfolio. In fact, they have generally not reviewed the individual holdings since the time at which they were purchased.
• Such clients are not aware of their overall asset allocation. Are they taking too much risk or too little? Is there a high degree of overlap (of the underlying holdings) within the funds held?

These problems are a sign of a collection of investments accumulated over time for various reasons, instead of a portfolio that was built as the result of a financial plan tailored to their unique situation.

Financial clutter can also extend beyond investments and may include:

• Nonexistent or missing beneficiary designations on insurance policies, annuities, and retirement accounts. The beneficiary designation is the final determinant as to how these types of assets are distributed at death. A missing or outdated beneficiary designation can cause these assets to go to someone other than whom you would choose. Beneficiary designations may need to be updated for various life changes, including marriage, divorce, birth of a child, or a family death.
• Outdated or nonexistent estate-planning documents. If you have minor children, you must have an up-to-date will that designates your desired guardian for those children. (Check with an attorney for the requirements in your state.) Without these documents, in the worst-case scenario, the outcome for your children and your family could potentially be very ugly. For more help, see my previous blog post, “How Often Should I Update My Estate-Planning Documents?”
• Lost or misplaced assets. This is a huge problem and the reason why most states have an unclaimed property department (usually in the office of the state treasurer). This situation can even happen to professionals. About a year ago, I discovered that around $1,500 had been sent to a former address in 1985. I completed the paperwork, and 12 weeks later I received my check from the Wisconsin treasurer.

Whether you are working with a financial advisor or you’re a do-it-yourselfer, I urge you to eliminate the financial clutter in your life. Cleaning up your finances periodically can yield tremendous dividends for you and your family.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

READ MORE: 

The Real Cost of “Free” Financial Advice
Why You Might Need Life Insurance at Retirement
Investing Tips for All Ages: 401(k) Investment Strategies
How Rising Oil and Gas Prices Might Affect Your Portfolio
Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
Should You Use Retirement Savings to Pay Off Debt?

Since 2003, I have been a member of the National Association of Personal Financial Advisors, or NAPFA, which is the largest professional organization of fee-only advisors. Several years ago, NAPFA created a number of small study groups. The group to which I belong has nine members, and all of us are either solo or have one partner.

Over the past few years, my fellow group members have become trusted confidants and friends. Essentially, they are my external board of directors. We have a bimonthly conference call and meet twice per year in person; we had our winter get-together in Phoenix at the end of February.

When we meet up, it’s more like a reunion than a business meeting. On the first night of our most recent meeting, we caught up over happy hour and introduced one of our members to Mexican food at a local joint.

However, we soon got down to business. The agenda over the next day and a half was intense and focused. We compared our year’s progress against last year’s goals, and we presented business goals for the next year to the other members. Full disclosure was the group rule as we recapped the prior year’s financial reports and projections for the current year.

Because we all work on our own or with one partner, these meetings are necessary to evaluate how we’re conducting our business and to get feedback from peers. During the discussion of my goals for 2011, several group members offered some very constructive feedback suggesting that I might be spreading myself too thin. At last year’s meeting, I urged another member to charge more for her services, given the value she provides to her clients.

While these meetings are not required for continuing education, over the years we have gone above and beyond, discussing client issues, technology, countless financial planning topics, and more. Additionally, over the course of the year, these folks tend to be the ones I call to bounce ideas off of or for help in dealing with a client issue that might be outside of my knowledge base.

Why should you—or anyone—care about what I’ve just described?

Our willingness to open our books and business plans is a leap of faith. We all took this leap of faith as a means to gain feedback on our businesses and to look for ways to improve what we do and how we do it.

But mostly you should care because our conversations are all centered on how to be better financial advisors for our clients.

The next time you talk with your financial advisor or are interviewing a prospective advisor, ask if he or she meets on a regular basis with any advisor colleagues. If the answer is no, it may speak to the way the advisor runs other areas of his or her business. If the answer is yes, you can then ask about the content and subject matter of the conversations–is the advisor simply learning new sales techniques or is the advisor learning about new strategies and planning tools for the benefit of his clients?

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

Read More:
The Real Cost of “Free” Financial Advice
Why You Might Need Life Insurance at Retirement
Investing Tips for All Ages: 401(k) Investment Strategies
How Rising Oil and Gas Prices Might Affect Your Portfolio
Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
Should You Use Retirement Savings to Pay Off Debt?

Recently, a friend asked me to look over his mother’s holdings. His mother is in her late 60s, recently divorced, and on her own financially for the first time. She decided to go with the financial advisor rep at her local bank for some free investment help.

Because she didn’t pay for any sort of initial planning review, she’s $1,500 or so ahead, right? We’ll see.

I may be biased, but if a friend or family member asked me, I would probably tell him or her to see a fee-only financial planner to help figure out how to achieve their financial goals.

Did the free advice lead to the best choices?

My friend’s mother’s overall portfolio is about $400,000. She receives some money from Social Security and a small amount of alimony, but there is still a monthly gap to be filled from her investment assets.

The rep put about half of her assets in a variable annuity contract with a well-known insurance company. The insurance cost on the contract is 1.4 percent—before the costs of any of the investment sub-accounts are layered on. Add in the investment costs, and you are looking at an expense ratio in the 2.25 percent to 2.50 percent range.

In addition, the contract imposes a surrender charge that starts at 6 percent of assets and drops to 2 percent in year seven. Keep in mind, this is just the cost to my friend’s mother to get access to her own money! Of the 98 sub-accounts with a Morningstar rating, just 40—not even half—are ranked a four or a five, the two top rankings in this system.

Contrast this with an annuity offered by a well-known fund company that carries no surrender charge, has an insurance cost of 0.3 percent, and, of the 15 sub-accounts offered, offers 14 that are ranked four or five stars by Morningstar. Based on the value of the annuity, the difference in the insurance costs annually amounts to about $2,000. One year’s worth of the fee difference would have likely covered a review of her situation by a fee-only financial planner.

It gets worse.

There seemed to be no rhyme or reason to the bonds chosen. Within this portfolio there are some agency bonds, a preponderance of bonds issued by financial services firms, and several bonds that are barely investment grade. No laddering or any other discernable strategy seemed to have been employed here.

Finally, I noticed that the IRA account included both sector ETFs and index-linked CDs—choices I simply could not understand. In the end, I found myself asking what the cost of this “free” advice really was. I’ll leave that for you, the reader, to decide. In the meantime, if you are looking to hire a financial advisor at some point, take a look at this blog post to learn a few questions you might want to ask.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

Read More:
Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
Should You Use Retirement Savings to Pay Off Debt?

Traditionally, conventional wisdom was that life insurance was generally not needed once you retired. This may or may not still hold true and will vary based upon your personal situation. Here are a few thoughts.

As you near retirement, life insurance can be…

• An excellent estate-planning tool. If you have a large estate, life insurance can be used to help your heirs pay any estate taxes that might be due. At the federal level, the current exemption is $5 million, but there may also be estate taxes at the state level to consider. As always, it is best to discuss this with your financial, tax, and estate planning advisors to see what applies to your situation.
• A bridge to “final” retirement. For many of us, this is not retirement as our parents knew it. By this I mean that many folks continue to work into what were traditionally retirement years, either because they want to stay active and connected or out of financial need (or sometimes both). Perhaps working a few more years will allow you to amass the nest egg that you need to be able to retire cold turkey. Should you die prior to being able to accumulate these extra savings, life insurance can fill this financial gap for your heirs.
• A form of assistance for a child with special needs. If you have a child or grandchild with special needs, life insurance can be a means to provide funds for his or her care after you are gone.
• A means to honor charitable intentions. You can leave a charitable bequest by making the organization the beneficiary of your life insurance policy.
• A tool to help pass on a business. You might still have an ownership interest in a business entity continuing into retirement. This ownership interest will be a part of your estate and could be subject to estate taxes. Life insurance can be used to pay those taxes, just like it can be used to pay personal estate taxes. Further, the life insurance proceeds can be used to buy out your heirs and to allow the business to go to the remaining owners. Life insurance is also a common tool in a buy-sell arrangement. Again, it is best to consult with qualified advisors in establishing this type of arrangement.

As with any type of insurance, whether or not to own life insurance during retirement will be dependent upon having a risk to insure against. It can be easy to be sucked in by life insurance agents portraying it as an investment or a tax shelter. While everyone’s situation is different, in my opinion, life insurance should be viewed as a death benefit. This should drive your decision, whether this involves keeping a policy in force or purchasing a new policy.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

Read More:

Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
Should You Use Retirement Savings to Pay Off Debt?

The past several years have been rough on many 401(k) participants. The 2008–9 market decline had a devastating impact on many participants nearing retirement. The press, and many annuity salespeople, have had a field day bashing the 401(k) as a poor retirement savings vehicle.

The reality is that 401(k) accounts are a part of your investment portfolio and need the same attention and monitoring that your IRAs, stocks, and mutual funds do.

Many will debate whether it is right or fair to put the onus for funding retirement on the backs of employees. Let’s leave that debate to others and focus on how to make the best of your plan and investment options.

For those who are starting out in their careers, my suggestion is to contribute as much as you can afford to your retirement plan. At the very least, try to contribute enough to receive the full company match. You have the luxury of time and the ability to take advantage of many years of compounding your investment returns.

For those of you in the middle of your career, you should think about maxing out your contributions. This can be tough, especially if you are also trying to save for your kids’ college educations, let alone incurring the ongoing costs of raising a family. The expectation at this point is that your career is on the move and your compensation is rising as well.

As you get closer to retirement, continue to max out your contributions. You might be in the middle of your kids’ college years as well. Keep in mind that the best gift you can give your children is not being a burden to them financially in your old age. Save all you can at this stage.

Here are some investing tips for any age:

• Diversify. Allocate your assets in accordance with your retirement goals and your risk tolerance.
• If you have investments outside the 401(k) plan, allocate your 401(k) as part of an overall portfolio, not as a stand-alone account.
• If your plan is lousy, try to choose the best couple of funds in the plan and focus your contributions there. This assumes you have investments outside of the plan and can balance out your overall allocation with those outside investments.
• Don’t assume that your 401(k) alone will be enough for retirement.
• If you go with the plan’s target-date fund, make sure you understand the pros and cons of this option.
• Don’t overindulge on your company stock if that is a plan investment option. If you don’t know why this can be hazardous, just find a former Enron employee, who can unfortunately speak volumes about this.
• If you think your company’s plan could be improved, talk to the plan’s administrator. Do your homework first and approach him or her in a polite, businesslike fashion.

Your 401(k) plan is likely your biggest retirement savings vehicle. Be in control of it; make it work for you.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

Read More:

Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
Should You Use Retirement Savings to Pay Off Debt?

Anyone who drives a car is keenly aware of the swift rise in the price of gas. This is largely a result of political uncertainty in the Middle East. What impact will the increase in oil and gas have on your portfolio?

The answer varies. In some cases, you’ll see a direct positive impact on your portfolio. Here are some examples:

• Major oil companies, such as Exxon Mobil and Chevron, have seen impressive increases in the value of their shares over the past several months.
• This is likewise the case with funds and ETFs, such as iShares North American Natural Resources (ticker IGE), which have a significant allocation to energy-related stocks.

Here are some examples of a direct negative impact on your portfolio:

• The stocks of airlines, for which the cost of fuel is a major expense, will likely experience a negative impact, all else equal. This may be negated if they are able to increase pricing or find additional annoying little fees (like those for checked bags) to heap upon the flying public.
• Companies in the transportation business, such as trucking concerns and express delivery services like FedEx and UPS, will be negatively affected to the extent that they do not have sufficient pricing power to offset the increase in fuel costs.

Beyond such obvious positive and negative impacts, many companies (and perhaps the price of their shares) may see some change in an indirect way. Here are a few potential examples:

• Many online retailers have begun to offer free shipping to stimulate sales. If they continue this practice, their margins may suffer if shippers like FedEx and UPS are forced to raise their fees to cover increased fuel costs.
• Archer Daniels Midland could see its profits (and perhaps its stock price) positively affected if higher oil prices lead to increased demand for ethanol and other alternative fuels.
• Food companies will see their transportation costs increase, and their margins could suffer to the extent that they can’t increase prices to offset this.

For mutual fund and ETF investors who don’t own the shares of single companies directly, this is a good time to review the holdings of each fund to determine if rising fuel costs will affect them positively or negatively. In doing this, investors should keep in mind that mutual funds are required to report their holdings only at set intervals over the course of a year, so the information could be a bit dated, depending on the fund’s turnover of holdings.

Higher gas and oil prices could also have a negative impact on fixed-income investors. Higher fuel and energy prices have an inflationary impact upon the economy, both directly and indirectly, as discussed above. Higher inflation is the enemy of bond holders, in that it decreases the purchasing power of the fixed-interest payments they receive over the life of the bond. This is also the case for holders of bond funds and ETFs.

This article scratches the surface of how higher gas and oil prices could affect investors. Please add your thoughts in the comment section.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

Read More:

Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
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Different investments earn different rates of return, and over time your allocation will become unbalanced. Thus, you will want to review your portfolio periodically and make adjustments to rebalance it.

While rebalancing is easy enough to understand, it is often a difficult concept for investors to implement. Rebalancing goes against your basic instincts. With rebalancing, you are basically selling those investments that are performing well in favor of those that are underperforming. It might help to remember that you are following a basic investment principle when rebalancing: you are buying low (underperforming investments) and selling high (well-performing investments).

A few thoughts on rebalancing:

Rebalance at least annually. Rebalancing too frequently can be counterproductive and may result in excess costs in the form of short-term redemption fees on mutual funds or frequent trading commissions for individual stocks or ETFs. Generally, rebalancing semi-annually or annually works well. Choose a date to rebalance—perhaps at the beginning of the year, when you receive your annual statements, or at the end of a quarter. On this date, compare your current allocation to your target allocation. If your current allocation is off by more than the limits specified in your financial plan, then rebalance back to the target allocation for that asset class.

Rebalance when your allocation differs from your target allocation by a designated percentage. At the preselected rebalancing interval, review your overall portfolio by asset class. Ideally, your investment policy has a target allocation percentage and an acceptable range for each investment style. For example, your target allocation for large-cap domestic stocks might be 25 percent, with a range of 20 to 30 percent. So if the percentage allocation is between 20 and 30 percent, you do not need to rebalance.

If the allocation is right at the high or low end of the band, you may or may not want to bring it back to the target. This is where you may decide to be a bit tactical in your rebalancing based on your outlook for a particular investment style. For example, if your bond allocation is at the lower end of your target range and your personal outlook for bonds is poor, then you might want to allow this allocation to stay at the lower end of the range. Should the allocation fall below the lower end of the range, however, you will want to rebalance enough to at least bring the allocation back within the target range.

Rebalance regardless of current market conditions. Many investors abandoned their asset allocation during the 2008–9 market downturn largely based on fear. In many cases, they bailed out of equities altogether. Many did this near the bottom of the market and have never gotten back into the market. These investors suffered the cruelest of all fates: they booked large losses, and because they stayed largely or totally out of the market, their portfolios did not recover as part of the torrid market rally off the March 2009 lows. As tough as it might be to stomach losses, if you have a long-term plan that includes an investment strategy, try to stick to it and rebalance at regular intervals.

Once you’ve decided what needs to be rebalanced, you need to implement those changes. If the change is within a tax-deferred account, such as a 401(k) plan or individual retirement account, it can typically be made without tax ramifications. With taxable accounts, you’ll want to consider the tax ramifications before implementing the change.

If the sale of an asset will result in a tax liability, consider other methods to implement the change. For instance, new investment dollars can be directed to the underweighted portion of your portfolio, or periodic interest, dividends, or capital gains distributions can be redirected to the underweighted portion.

Regardless of whether periodic rebalancing might trigger some tax consequences, reviewing and rebalancing your investments is vital. Markets change, often swiftly and violently, as we saw in 2008–9. Periodic rebalancing forces you to take some of your gains off the table. Many investors are good at picking investments for purchase. Far fewer have a sell discipline.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

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Commissions are pretty easy to understand. The adviser is compensated when he or she sells you a financial product—such as a mutual fund, an annuity, or an insurance policy. If the adviser doesn’t sell you anything, he doesn’t get paid.

With this arrangement, the client typically doesn’t write a separate check for the commissions. They are paid by the financial product provider and reduce your ultimate return. But just because you don’t write a check for these fees doesn’t mean the costs to you aren’t very real.

There is an inherent potential conflict of interest in this arrangement in terms of the advice you might receive. Muddying the waters even further, commissions for many of these products are never disclosed. Clients don’t realize how much they are paying and are often unaware of the costs.

Types of commissions can include:

• Front-end sales fees on mutual funds
• Deferred mutual fund commissions (typically B shares)
• Level ongoing mutual fund commissions (typically C shares)
• Trailing commissions, such as 12b-1 fees
• Surrender fees
• Front-end commissions on annuities and insurance policies
• Transaction fees of various types

Fee-based compensation, in my opinion, is the most confusing form of adviser compensation. A typical fee-based arrangement might involve a financial plan prepared for a set fee. If the client wishes to implement the adviser’s recommendations, it is generally done via the sale of commissioned products.

Many people confuse this method with fee-only compensation. In reality, fee-based advice is simply another form of the commission method.

Fee-only compensation is fee-only, period. The adviser collects no compensation from any provider of financial products—no trailing fees, no commissions, etc. The adviser is compensated strictly by fees the client pays. The benefit of this arrangement is that the adviser has no incentive to steer you to any particular financial product or product provider. Going the fee-only route does not ensure that a given adviser is right for your situation, but a fee-only adviser is a good starting point.

Understanding how your financial adviser is compensated is a critical piece of working with an adviser. As a client or potential client, you should insist that the adviser disclose ALL forms of compensation he or she will receive, from all sources, by working with you. This will help you determine the total cost of the relationship, and it will help you assess potential conflicts of interest that might taint the advice you receive.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants and Retirement Fiduciary Advisors. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.

Read More:

Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
Should You Use Retirement Savings to Pay Off Debt?