Choosing the "right" NAPFA advisor, and whether fees are fair, etc.?

Question

As most of you perhaps know already, NAPFA is an association of fee-only financial advisors who do anything from pure investment to tax advising to "full spectrum" financial planning. As opposed to advisors who work for very little, or for free, these advisors have a fiduciary obligation to their clients, and often have a higher degree of training than other folks offering similar services.

I learned about NAPFA here on money.SE and called a few in my area. I asked for the following services:

• Estate planning
• Insurance advice (do I have enough?)
• Retirement planning (am I saving enough?)
• Kids college planning
• Tax planning

Every NAPFA advisor has said he can handle these things easily. I have a very simple portfolio with just a salary income, a 401k, a single home, and no capital gains. There are a lot of advisors in my area and competition is fierce, although there are a lot of very wealthy people here as well, which perhaps drives up fees.

What would you recommend I look for (or look out for) when selecting an advisor? Is there a way to evaluate whether their fees are fair without experience dealing with an advisor previously?

Answer 1

Some sample prices for straightforward pay-for-hours-or-deliverables planners:

• I was just talking to a planner in my area, and his rates are $150/hour, but for a complete plan he'll do a flat fee project at probably about $1000 depending on complexity and then it comes out to about $100/hour.
• Vanguard charges $1000 for a complete plan if you have less than 50k in assets, $250 if you have up to 500k and free if you have more.

I think I've seen some similar rates elsewhere, too. I'd feel like you might get something perfunctory and boilerplate for too much less than $1000 - how could the person afford to spend much time? - and I'd feel like lots more than $1000 for just a standard straightforward plan might be a ripoff. Basically you're paying $1000 for a day or two of work, you don't want just a couple hours of work, but you don't need a week of work either.

Anyway, extracting the general guideline (since prices may vary regionally or over time), you could figure it takes a day or two to do a decent job on a basic complete financial plan without a lot of complexities in it. From there you can decide what's fair, adding or subtracting time if you need less than a complete plan or have complex issues.

This is assuming you're paying for time and deliverables, which is not a given. The biggest factor in how much you pay is probably how they charge; a couple of the most common models,

• Hourly. You are paying for advice. Some planners doing this are part of the Garrett Planning Network which is basically a franchise; the general idea is that you will do a lot of implementation yourself and just need some sanity checking and help with tricky parts. You might pay pure hourly, or you might pay an agreed-on flat project fee for a complete financial plan.
• Percentage of assets. You are paying for investment management, and it costs say 1% of assets per year or something like that, often with "volume discounts" if you have more assets.

(There are other models but these are the ones I've seen most.)

The difference between these two models is a lot of money over time.

Hourly is going to be much cheaper, because it's a one-time cost instead of ongoing, and unrelated to what you have in assets. However, you won't get investment management, which can be valuable if you aren't the kind to stick to an investment plan or you want someone else to completely take care of it for you. The investment-management planners have the potential to make a lot more money (and are more likely to be in it for the money). Hourly planners don't really have as good a business from a business owner's perspective, but they are cheaper from a customer perspective, as long as you're happy to DIY a bit.

One thing I like about hourly planners is that I don't really feel investments are the main place planners can add value, so it makes me nervous to have the compensation based on that. Insurance, estate planning, taxes, etc. are where it's harder for a layperson to know all the ins and outs and DIY.

From what I've seen, the cheapest planners are the ones that you can get free or discounted from companies like USAA or Vanguard if you have an account with them. However, they will only recommend products from the company in question, so that's a downside, and you probably won't get to meet them in person.

This question may be useful too: What exactly can a financial advisor do for me, and is it worth the money?

Answer 2

The nature of this question (finding a financial adviser) can make it a conundrum. Those who have little financial experience are often in the greatest need of a financial adviser and at the same time are the least qualified to select one. I'm not putting you or anyone in particular in this category. And of course it's a sliding scale: In general the more capable you are of running your own finances the more prepared you are to answer this question.

With that said, I would recommend backing up half a step. Consider advisers other than strictly fee-only advisers. Perhaps you have already considered this decision. But perhaps others reading this have not.

My (Ameriprise) adviser charges a monthly (~$50) fee, but also gets percentage-based portions of certain investments. Based on a $150/hr rate that amounts to four hours per year. Does he spend four hours per year on my account? Well so far he does (~2 yrs). But that is determined primarily by how much interaction I choose to have with him. (I suppose I could spend more time asking him questions and less time on this forum. :P)

I have never fully understood the gravitation towards fee-based advisers on principle. I guess the theory is they are not making biased decisions about your investments because they don't have as much of a stake in how well your investments to do. I don't necessarily see that as an advantage. It seems they would have less of an incentive to ensure the growth of your investments. Although if you're nearing retirement then growth isn't your biggest concern. Perhaps a fee-based adviser makes more sense in that scenario.

Whatever pay structure your adviser uses, it would seem to make sense to consider a successful adviser with a good client base. This implies that the adviser knows what he/she is doing. (But it could also just be a sign that they are good at marketing themselves.) If your adviser has a good base of wealthy clients then choosing a strictly-fee based adviser would mitigate the risk of your adviser having less incentive to consider your portfolio vs that of more wealthy clients.

To more directly answer your question I suggest asking several of your adviser candidates for advice on choosing an adviser. I suspect you will get some good advice as well as good insight on the integrity and honesty of the adviser.

Answer 3

Usually your best bet for this sort of thing is to look for referrals from people you trust. If you have a lawyer or other trusted advisor, ask them.