I recently attended a Leadership Training and Board meeting for my new role as a board member for the South Region of the National Association of Personal Financial Advisors (NAPFA).
For those unfamiliar with NAPFA, it’s the leading professional association of Fee-Only financial advisors. Members must commit to receiving compensation only by fees paid by their clients (as opposed to sales commissions), abiding to a Fiduciary Oath (meaning that advisors place the needs of their clients ahead of their own), and practicing comprehensive financial planning.
Admission to NAPFA requires peer review of a financial plan, 3 years of experience, and that the applicant to be a CERTIFIED FINANCIAL PLANNER™ professional. Once a member, NAPFA requires 60 hours of continuing education every 2 years. (The CFP Board requires “just” 30 hours every 2 years.)
In short, these people are serious.
I bring all this up because of a recent experience with the child of a client that highlights the importance of working with a financial advisor who has nothing material to gain from the investments in your portfolio, as well as who operates as a fiduciary.
From time to time, we’ll handle accounts of our clients’ children as a courtesy. In this case, we had already opened a Roth IRA for the child, and he asked if he might move his Traditional IRA from where it was currently located (a well-known national bank) to TD Ameritrade, where his new Roth IRA was located. We’re all for keeping things administratively simple, so of course we said yes.
Upon receiving his IRA statement, we noted that it contained a single investment in what’s called a Moderate Allocation fund, meaning that the fund invested in a mixture of stocks and bonds, tilted more towards the stock side. (To be precise, the fund was 70% stocks, 30% bonds.) Given that the account holder probably won’t be retiring until at least 35 years from now, this didn’t make a whole bunch of sense to us. With a time horizon that long, a much heavier stock allocation is appropriate.
But even more alarming were the fees. The fund was an “A-share” fund; shares of A-share funds are usually accompanied by an upfront sales load that is charged upon purchase. In this case, the sales charge was 5.5% of the initial purchase amount. So after just one day as a shareholder, the fund owner was already “down” 5.5%.
On top of that, the annual expense ratio of the fund (the amount paid to the managers of the fund) was 1.36% of the account balance per year, including an ongoing payment of 0.25% to the institution that sold the fund (called a 12b-1 fee). For comparison, according to Morningstar, the average expense ratio for other funds of this type is just 0.87% per year. A comparable fund at Vanguard (the Vanguard LifeStrategy Moderate Growth Fund; ticker symbol: VSMGX) carries an expense ratio of just 0.16% per year.
The people who sold this fund to our client’s child were also serious, though I doubt it was about his long-term financial success. Rather, with sales charges and fees like that, they were serious about lining their own pockets.
The client’s child is now in a fund much more appropriate for their time horizon, and at a significantly lower cost. If you’re still looking for a graduation present, you might consider buying an hour or two of time from a fee-only advisor, like those that belong to NAPFA. While Woodward Financial Advisors doesn’t work on an hourly basis, we do know of some very talented Chapel Hill and Durham-based NAPFA members who do. Our goal is for all folks seeking planning and investment advice to land in a safe place that’s right for them, so we’d be happy to make a referral.
 If you ever want to see a fee-only advisor get really worked up, ask them their opinions about 12b-1 fees.
 If you’re just looking for a book recommendation to your millennial children or grandchildren, I highly recommend William Bernstein’s If You Can: How Millennials Can Get Rich Slowly, available in both Kindle and Paperback formats: http://www.amazon.com/If-You-Can-Millennials-Slowly-ebook/dp/B00JCC5JKI