Fee Based Financial Planning is the Future

I began my career in 1998 as currency market analyst for a 24 hour forex news and analysis service. My shift was from 4pm to mid-night which coincides with the opening of the Asian markets. In particular, I was focused on Japan. When I started, Japan had a stagnant economy and it had been stagnant for over a decade. The long-term cyclical downturn had actually started with a crash in the real-estate markets. Just like in America, there had been a speculative frenzy which divorced price from the real value of property. Its almost been 30 years since the bubble burst and Japan is still in economic stagnation.

Why am I making this point?

I don’t think Americans think that an economic downturn can last 30 years. I am a middle age man (my wife thinks I am still in my prime) and I can remember 4 recessions and subsequent recoveries. When I was a kid, I remember being in the car for hours waiting in line to get gas.  I remember the stock market crash of 1987. I was trying to raise money for a start-up in 2000, and everyone reading this article lived through the recent housing bubble popping. My point is that in America we think that things will return to normal – meaning the economy will be growing again within a few years. I am not trying to say this will not happen, but I am raising the possibility that it will not.

Lets say there is a new normal – zero to very limited economic growth.

If this is the case, we would expect low interest rates, low inflation, and a relatively flat stock market. In this type of environment,  consumers of financial services are going to be very fee conscious. If you expect the market to increase the value of your portfolio by 12%,  paying a fee of 2.0% is not going hurt that much.

If you expect returns to be 5%, a fee of 2.0% will hurt a great deal.

I believe this is the reason that PIMCO released TRXT, an ETF version of the Total Return Fund. They expect returns on bonds to be low and are trying to find a way to lower the fees for investing. The only way they can do that is by forcing financial advisers to lower their fees. Essentially, PIMCO is giving a way for investors to see if their financial advisers are making big fees for putting their money into mutual funds. Its only a matter before other mutual funds follow PIMCO’s example and start ETF versions of their funds.

In the end, financial advisers are going to have to shift they way the make their money.

Some financial advisers have already shifted to new models, where they are compensated by the client instead of by the mutual fund whose products they are selling.

Many financial advisers are now being compensated for time and have committed to not receiving any compensation from the providers of financial products, removing them from a very real conflict of interest. If you want the best advice a financial planner has to offer and to potentially lower your costs of investing, go with a fee only financial planner.

In tomorrows article we will look at 5 great places to find fee only financial advisors.

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