If you have the time and expertise to build and regularly monitor your portfolio to maintain proper and effective diversification, tax-loss harvest to reduce taxes, manage commissions and expenses, etc, then you may just want to manage your own portfolio and invest that extra 1-2%. If you don’t have the expertise or time to regularly do these things, then you may be making less or paying more than you should. Our clients report that the increase in their after-tax, after-expense returns by using our services more than justifies our 1-2% management fee.

Generally by commission. The more transactions they convince you to undertake, the more they make. Generally, their bottom line is affected by the number of transactions you perform and not by whether your account balance grows.

While not true in every case, some financial planners earn most of their compensation at the time of setting up a client account. As a result, these advisers have incentive to get clients in the door, but not necessarily to provide valuable ongoing management or oversight.

We evaluate many portfolios managed by stockbrokers or financial planners. In our experience, the majority of these portfolios include investments that are not right for the client. The most common example is high-load or high-expense mutual funds where a more efficient, less expensive alternative is readily available. We also commonly see large brokerage commissions or other large fees that are often not obvious just by looking at the brokerage statement.

Not all advisers or planners invest their clients’ money. In many cases the adviser with whom you directly interact does not actually invest any of your money. They pass the business of managing your money to another division or affiliated investment company to actually invest your money. As a result your adviser may not know the details of your portfolio, and the person actually investing your money may not know anything about you. We have even heard clients of such advisers complain that the adviser was essentially playing the part of a salesman rather than a trusted adviser. Jacobs Equity clients like to know that their money is invested and managed by the advisers they met on the first day.

When people talk about a “free” adviser, they are generally referring to a financial planner that provides recommendations without charging a fee. Such planners generally are compensated through commissions or referrals. In other words, they make money when you agree to buy a certain product. As the astute reader will notice, this type of arrangement presents an inherent conflict of interest by encouraging the planner to recommend products based on the size of the commission or referral bonus, and not on their suitability for the client.

As mentioned in a previous question, “free” advisers make money through commissions or referrals. The advice is not free of course. Ultimately the client pays for the advice through fund fees, loads, or an improperly structured portfolio as a result of conflicts of interest.

As a fee-only adviser our advice is independent and unbiased, eliminating a problematic conflict of interest that compromises the recommendations made by advisers and planners compensated by commission or referral arrangements. Our clients save money because they don’t pay the mutual fund loads that finance the referral fees. It also means we are fee to choose the best securities for our clients rather than the securities that pay the highest “finder’s fee.”

Ask your adviser if he or she accepts referral fees or “finder’s fees” from mutual funds. If the answer is yes, ask how much he or she received by selecting particular mutual funds on your behalf. You should also ask whether he or she would have selected those particular funds if there had been no referral fee.