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Q&A: Beware the Blurred Line Between Fee-Only and Commission-Based Advice

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Dear Liz: I am very overwhelmed with life so I’ll try to stick to where I need your help. My 68-year-old husband has been diagnosed with dementia. I thought we were responsible, having a nice nest egg of over $2 million, a house that is paid off and no debts. However, finding out long-term care costs, I am now terrified that it will all be depleted. Per your advice, I found a fee-only financial planner. I wanted his opinion about long-term care insurance for myself (my husband no longer qualifies). Turns out the planner will be the one to get the policy for me, should I decide to go forward. He’s recommending a hybrid policy with a death benefit, which means if I end up not using the long-term care coverage, the value will go to our children. I’m uncomfortable with the fact that this planner has an obvious stake with this long-term care policy and therefore might be biased with his advice.

Answer: If your advisor has an “obvious stake” in the policy you buy, implying that he will be paid a commission, then by definition he is not a fee-only financial planner. Fee-only financial planners are compensated solely by the fees they charge their clients.

What you may have encountered is a fee-based advisor, who collects fees from clients but also accepts commissions.

You want to be able to trust that the advice you get is in your best interests. That means you need a fiduciary advisor: someone who is obligated to put your interests ahead of their own and who is willing to put that promise in writing. If your advisor isn’t a fiduciary, you can find one who is through one of several organizations that represent true fee-only advisors, such as the National Assn. of Personal Financial Advisors, the Garrett Planning Network, the XY Planning Network or the Alliance of Comprehensive Planners.

The advisor also should be able to refer you to an elder law attorney who can discuss ways to protect your finances from being devastated by long-term care costs, or you can seek referrals directly from the National Academy of Elder Law Attorneys.

Q&A: Where can I get advice on saving money?

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Dear Liz: Could you possibly recommend a financial advisor I could sit down with who could counsel me on ways to save money? I work a full-time clerical job, but worry all the time about being homeless someday.

Answer: Talking with a financial expert can help you formulate a sound plan for your future, which in turn can help allay your fears.

Start with your employer. Some companies offer financial wellness programs that may include one-on-one counseling. Others offer financial advice through their 401(k) or other retirement plan providers.

Another option is an accredited financial counselor. These professionals provide advice on budgeting, debt, credit, retirement savings and other money topics. They’re fiduciaries, meaning they’re required to put your best interests first. Some are employed by credit unions or the military, and others offer a sliding scale. You can start your search at findanafc.org.

The National Foundation for Credit Counseling at www.nfcc.org primarily helps people pay off credit card debt, but its member agencies also offer budget counseling. You can find its budgeting tool at www.nfcc.org/resources/monthly-expense-tool/.

Q&A: A husband handles the investing. What happens when he’s gone?

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Dear Liz: My husband has always handled our investments. He doesn’t think it makes sense to pay someone 1% to do what he can do on his own. As we’re getting older, I’m starting to worry about what I would do if he dies first. We also have a friend who got scammed, and it’s made me wonder whether that could happen to us. I would like to talk to a fee-only advisor like you always recommend, but I’m not sure how to get him on board.

Answer: Start with your concerns about having to take over the finances should he die or become incapacitated. Having someone trustworthy to help you through this process can be incredibly valuable, and it doesn’t need to be someone who charges 1% to manage your investments.

You can get referrals to fiduciary, fee-only planners who charge by the hour at Garrett Planning Network. The XY Planning Network and the Alliance for Comprehensive Planners represent fiduciary, fee-only planners who charge retainer fees. (Fiduciary means the planner is committed to putting your best interests first. Most advisors are held to a lower suitability standard, which means they don’t have to put your interests ahead of their own.)

Researchers have found that our financial decision-making abilities peak at age 53. Unfortunately, our confidence in our financial acumen remains high even as our cognition declines. The growing gap between our self-regard and reality can leave us vulnerable to bad investments, bad decisions and bad people.

An advisor could take a look at your portfolio and recommend ways to make it easier to manage as you age. The advisor also could discuss strategies and safeguards to protect you from mistakes and predators. Once you have established the relationship, you should be able to get more help down the road if you need it. (Consider the advisor’s age and status, though; a younger advisor or one who’s part of a large practice might be a better idea in this scenario than a solo practitioner who is approaching retirement age.)

Q&A: Beware the insurance salesperson in financial planner’s clothing

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Dear Liz: Do you have any general advice for choosing a tax preparer? My financial advisor has recommended switching my 403(b) contributions over to Roth 403(b) with the same investment plan. I am worried that this could put us at risk for a higher tax bracket currently.

Answer: Ideally, a financial advisor wouldn’t recommend switching to a Roth option without knowing a fair amount about your current and future tax situations. Otherwise, the advisor wouldn’t be qualified to determine whether giving up the current tax break is likely to pay off later.

Unfortunately, not all financial advisors are truly qualified to give the advice they do. Some, particularly those advising people about 403(b) investments, are insurance salespeople rather than fiduciary financial planners.

You can get referrals to tax pros from the National Assn. of Enrolled Agents and your state’s chapter of certified public accountants. (The American Institute of CPAs has compiled a list of those at its website.) Both enrolled agents and CPAs are fiduciaries who promise to put your best interests first.

For broader financial advice, consider getting referrals from one of the organizations representing fee-only fiduciary planners such as the Garrett Planning Network, the XY Planning Network, the National Assn. of Personal Financial Advisors and the Alliance of Comprehensive Planners.

Also, teachers should consider spending some time on the nonprofit 403bwise website, which grades school districts’ retirement plans and seeks to educate teachers about the costs of trusting the wrong people.

Q&A: Is it better to spread your wealth between two financial advisors?

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Dear Liz: My parents left me with financial accounts at two companies. My instinct is to combine them to deal with one less company. Is there a downside to doing this?

Answer: You should first determine whether any of the inherited accounts is a retirement account because those come with special rules. You can’t simply merge an individual retirement account with a taxable brokerage account, for example. And you’ll want to consult a tax pro to understand how to properly title and take distributions from any inherited retirement account.

If the accounts are regular taxable accounts, then consolidating can have many advantages. Your accounts will be easier to monitor, asset allocation strategies will be simpler to execute and your account expenses could drop, particularly if you use the lower-cost company. Some brokerages offer deposit bonuses, and a higher combined balance also may entitle you to additional perks.

The primary downsides to consolidation involve risk mitigation. Brokerage failures are rare, but they do happen, and some investors opt to use more than one brokerage if their account balances exceed coverage by the Securities Investor Protection Corp.

SIPC provides coverage of up to $500,000, including $250,000 for cash, if cash or securities are missing from an account when a brokerage fails. Similar accounts are combined for SIPC purposes, so multiple IRA accounts at one brokerage will be considered one account. However, the $500,000 limit applies to each category of account. So someone with an individual account, a joint account, an IRA and a Roth would have a total of $2 million in SIPC coverage.

Having accounts at different companies also can help you retain access to at least some of your money if one of your accounts is hacked.

Q&A: Minimizing your taxes is fine — to a point

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Dear Liz: In reading your columns, one can get the impression that reducing tax liability is the primary objective for many financial advisors. I disagree with this. Paying a fair share of taxes is a responsibility to society and the less fortunate, especially for wealthy people. Why are so many financial “professionals” so obsessed with paying less in taxes?

Answer: Tax planning is an essential part of comprehensive financial planning. No one is under an obligation to pay the maximum tax possible. Those who specialize in tax avoidance love to quote a judge named Learned Hand, who wrote in 1934: “Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”

Where advisors — and taxpayers — get into trouble is when they prioritize tax avoidance over all other concerns. That’s how you get advisors doing tax loss harvesting on a financial account to reduce capital gains for an older couple in the 0% capital gains bracket (an example of this behavior from a recent column).