Q. Why when you go to a financial planner do they want to sell all your investments and buy new ones? Then you have to pay taxes and their commissions and it will be a couple of years to break even. I guess their only interest is in making commission.
A. Not every financial planner will immediately sell all your investments and start from scratch.
It will depend on the quality of the investments you hold, how they meet your objectives and whether or not the planner is working in your best interest.
If your advisor works on commission, then yes, the advisor won’t make any money by keeping your existing investments. They’d have to buy new ones for you, and that’s how they’d earn a commission.
But not all planners work on commission.
Fee-based planners don’t make a dime when they sell your existing funds and move into new ones, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.
Lynch describes how his firm manages money to give you another view.
He said his company uses model portfolios for different types of investing strategies rather than custom portfolios.
For example, he said, he may have a 60 percent moderate portfolio that may consist of 10 to 15 mutual funds and exchange-traded funds.
“With that model, we may have 100 clients that use that model for part of their investment strategy,” he said. “To manage the model, on a quarterly basis, we review all the funds, see if we want to add or replace any funds, and possibly rebalance the model.”
Lynch said using their software, he can make the change for all the clients using that portfolio with a click of a button. If instead he had 100 clients in custom models, the review and implementation process would take far longer.
“So we may have 20 different models based on if the account is in a IRA or taxable account, whether we are investing new money or pulling money out, and how aggressive or conservative the portfolio is,” he said. “Some people may say that this is `cookie cutter’ approach, but I would suggest that if the advisor manages a substantial amount of money, they need to have a consistent process in place to provide a consistent return.”
Lynch said his methods mean he can make sure the performance of the individual funds is good verses their peer groups and that the portfolios are managed in a very systematic fashion — something he said is extremely important for compliance reasons.
He said there is one exception for taxable accounts.
“The end goal is to get the portfolio into a model, however, we may have to do that over time and sell out of positions slowly as to not create large taxable events,” Lynch said. “These taxable issues need to be communicated with the client in advance of any trades, and if they are not, you need to get another advisor.”
So, back to your question.
Not all advisors make commission by buying and selling investments for you. If you hire someone who works on a fee basis, you won’t have to worry about them making trades to line their own pockets.
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