Going Fee-Based Might Pay Off

March 9, 2008
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GRAND RAPIDS — Managing personal assets is probably the bare-bones reason people invest. But there is another layer to investing, and that is controlling the risk those investments face.

Controlling risk is often a tedious task for the average investor with a mutual fund account or an employer-sponsored 401(k) plan. Simply being able to identify all the potential risks that exist in a global financial market can be difficult.

Those risks include more than falling stock prices when production levels flatten or rising oil prices when demand exceeds supply. Risk also includes wars that break out on the other side of the planet in places many Americans haven’t heard of and terrorist attacks that occur in places of which they’re prominently aware.

That’s why fee-based planning has become more popular with investors since 2002, the year after the Sept. 11 terrorist attacks on the homeland that sent the nation’s economy into a freefall.

All major brokerage houses offer the service. But so do smaller financial institutions such as Lake Michigan Credit Union, which has contracted its investment services with LPL Financial.

A fee-based financial planner does not accept commissions or compensation from any other source than the client, unlike some money managers of a decade ago who sold their clients stocks representing companies that paid them commissions.

The only payment a fee-based planner receives from the client is either a flat annual fee or an hourly fee, depending on how in-depth the required service is. With no third parties involved, a fee-only approach normally involves fewer conflicts of interest.

A fee-based planner can provide a client with investment options, other than stocks and mutual funds, which a customer might not have thought of on his or her own, such as non-traded private real estate investment trusts, which could be a good selection for someone who is looking for an income-producing investment.

It’s the client who decides the degree of management that should go into a relationship with a planner. That can range from a complete management of finances by the planner — even purchasing an automobile on behalf of a client — to a small a la carte compilation of a single mutual fund or a broader investment portfolio.

Most planners aren’t attorneys or accountants but many will work with a client’s advisors when it comes to tax and estate planning. Services can also include mapping out policies for life and disability insurance or a plan for funds to cover college tuition costs.

Some planners focus more on investing with fund managers with a strong track record in a particular area — say, municipal bonds or large caps — rather than choosing funds themselves.

The key to managing risk, as most know, is diversifying investments. Reaching a serious level of diversity will normally require a client to invest $100,000. Investing $250,000 to $500,000 can result in an even more diverse portfolio. Even though smaller investors can’t be as diverse as larger ones, they still can buy into a more diversified fund for their money today than they could a few years ago.

The fee in fee-based planning usually runs about 1.5 percent, and in many cases the loads that accompany the selected funds aren’t charged to the client.

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