I respectfully take issue with a point raised in the editorial “Getting real on a "fee-only' definition” (InvestmentNews, Oct. 7).
The point being made was that any method of financial adviser compensation leads to conflicts of interest, including hourly financial planning. This isn't accurate but seems to be often used to rationalize, while marginalizing, the hourly business model.
If we look up the legal term “conflict of interest” in the Law.com dictionary, we see that it is “a situation in which a person has a duty to more than one person or organization but cannot do justice to the actual or potentially adverse interests of both parties.”
It really takes at least three parties to make a conflict of interest, one of whom is the adviser. Meanwhile, the hourly financial planner who has no affiliations doesn't have this conflict.
If this person bills a client for three hours while only working one hour, this isn't a conflict of interest. It is fraud.
If this person bills a client for three hours but another adviser could have completed the same work in just one hour, this is also not a conflict. The adviser may just be incompetent.
It is also possible that the adviser who spends three hours while others take only one may be doing something fundamentally different.
A detailed budget that focuses a client nearing retirement with practical things such as paying down debt, funding an investment portfolio and building a cash cushion — as would have been useful in 2007 — not only helps allocate her resources to meet upcoming goals, but easily converts into a budget in retirement that allows the same client to “minimize her income footprint.”
The end result? A huge reduction in her income tax rate in retirement, while maintaining the same standard of living, all from focusing on something on which many commission- and assets-under-management-based advisers don't spend much time: budgeting.
Imagining that the hourly model has conflicts of interest helps make the rest of the industry feel better.
As long as we act professionally and with the highest of ethics, the compensation method doesn't matter, some would say. This is highly misleading.
From the huge percentage of Middle America never served by AUM-based advisers for simply failing to meet their asset minimums, to the outrageous 2% expense ratios of some “adviser class” funds, the industry can't seriously maintain that it is doing all it can to help the general public. Accurately defining what is and what isn't a conflict of interest would be a good start.
Henry F. Glodny
Castling Financial Planning Ltd.
Hoffman Estates, Ill.