Monday, August 6, 2012

Assets under Management (AUM) ‘Fee Only Planning Compensation’ Conflicts: Part II

Assets under Management (AUM) ‘Fee Only Planning Compensation’ Conflicts: Part II

(Jim so) Assets under Management (AUM) compensation is like federal tax withholding – less painful than writing a check every quarter. You don’t feel it as it’s ‘taken out.’
A former client reacting AUM Part I

…but with less probability of refund

            I didn’t realize that the phrase assets under management was a synonym for fee anesthesia, & from planner having to justify the value of his services less often than a monthly check written by a client on a monthly retainer.
            I recall in the early 90’s many a commission (transaction compensated) and fee and commission  ‘financial’ planners asking me, ‘how do I transition to fee only planning with my existing client base?’
            I had two answers that I would suggest – tell the client

  1. In one year, I shall go to fee only compensation. You are more than welcome to continue the same compensation method for a year – or change now, but in a year my practice will be compensated fee only. It’s your choice.  OR
  2. I’ve been screwing you all these years, and I’ve finally decided to go legit.

No one took me up on option #2 to the best of my knowledge which would have been refreshing.

            Nearly all of these planners who made the transition choose to be compensated on a basis of assets under management. Some have tried to have it both ways (BI-Financial Planners?) – AUM for assets manage plus an charging an additional small flat fee for the planning. The fee plus AUM reinforces the point of AUM compensated personal financial planning as a Trojan horse for being asset managers camouflaged as a personal financial planners.
We do what’s inspected rather than expected and focus on what is compensated.

It is time for asset under management compensation planners to fess up and NAPFA to make a full disclosure note with biographies of its members of how they are compensated: hourly, flat fee, retainer, fee and commission, assets under management etc.

The above said, regardless of compensation method, the real question is doing an audit of the progress, you the client, is making towards or maintaining his personal financial goals (which is in both editions of my book Enough: A Handbook for Your Personal Financial Planning – out of print but probably you can get it for 99cents on the web).r entries on this blog).  The Personal Financial Planning Audit should be done upon engaging the planner (to establish a baseline), quarterly at a minimum the first year of the plan engagement, and at least annually thereafter to monitor progress.
Set up a chart: with goals down the left hand side. For example:

  1. Providing adequate income upon total disability
  2. Providing adequate income upon partial disability
  3. Minimizing capital depletion due to illness
  4. Minimizing capital depletion due to nursing home/home health care
  5. Providing for the kids education
  6. Providing for 100% of income from passive sources (retirement)
  7. Providing for 50% of income from passive sources (slow down) for some period prior to retirement)
  8. Minimizing liability: unintended creditors, personal guarantees etc
  9. Becoming independent of your independent business
  10. Providing adequate income for your spouse upon your passing
  11. Aligning your life goals with your personal resources
  12. Healing personal financial anxiety putting money in its place to transcend to significance
  13. Knowing what ENOUGH is
  14. Knowing what ENOUGH is versus MORE
  15. Etc etc.

Horizontally, have a scale from 1-10 (1 being lowest, 10 being highest) and grade where you are at now (if about to engage a planner). If you already have engaged a planner, think back and grade where you were before planning and do a first ranking (baseline and date it as of the beginning of the planning engagement). Next do the ranking again (separate sheet of paper and date it). The questions then become for comparison REGARDLESS OF COMPENSATION METHOD - has there been progress advance/ maintenance towards satisfying your goals or has there been retreat and or failure? (You might also note if retreat – has there been a concurrent increase of good lunches the planner has taken you to – to message your bottom and bottom line on goals?)

Comprehensive personal financial life planners manager goals; asset managers manage assets (and are typically compensated by YOUR ASSets under Management.
And that is a Salient fact.

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