Financial Planning for the Middle Class

Where the middle-income crowd can get help they can afford.

Financial planning is often perceived as a service reserved for the wealthy. That’s understandable. The more money you have, the more complex your finances are. But people who don’t have hundreds of thousands of dollars in savings need guidance, too, and they often don’t have enough money to satisfy the ever-increasing minimum asset requirements of some financial advisers.

In 2010, more than 80% of advisers defined their core market as clients with assets of $250,000 or more, according to Cerulli Associates, a research firm. Half of those advisers focused on clients with more than $1 million in investable assets, excluding money in employer-based 401(k) plans. A separate study by Price­Metrix, a wealth-management consulting firm, found that 25% of advisers who manage investment accounts for households that have between $250,000 and $500,000 in assets charge their clients annual fees of 1.75% or more of the amount they invest.

Although some independent advisers don’t have asset minimums, others shun smaller accounts. That leaves banks, insurance companies and mutual funds to serve the bulk of the market -- with “free” advice that is often a thinly disguised sales pitch for a CD, annuity or proprietary investment. Many call centers are staffed by a rotating roster of commission-based counselors, meaning that you may never get the same counselor -- or the same advice -- twice.

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Even if you don’t need an ongoing relationship with a financial planner or investment adviser, there are times when you have financial questions or just want someone you trust to assure you that you’re on the right track. For some, the solution may be as close as their workplace. For example, the Principal Financial Group, a leading provider of 401(k) plans, offers a wide range of personal-finance guidance -- from debt-reduction strategies to saving for college -- in one-on-one counseling sessions with plan participants. Nearly three-fourths of Charles Schwab’s retirement-plan sponsors offer participants access to third-party investment advisers.

Several financial-planning networks deliver cost-effective personal-finance advice to a wide array of consumers online, over the phone or in face-to-face meetings. Visit Garrett Planning Network or My Financial Advice for hourly financial planning advice and Smart 401k and Financial Engines for investment advice.

Perhaps you’ve experienced a major life event, such as a divorce or the death of a spouse, or you’ve received an inheritance or need to turn your retirement savings into a lifetime stream of income. Then you may need a longer-term relationship with an adviser.

WATCH OUR VIDEO for tips on how to find a financial planner.

Getting personal

Ashley Love, 28, a hairstylist from Vienna, Va., wanted to know whether she was on the right track for a secure future. Her employer doesn’t offer benefits, so she is on her own when it comes to buying health insurance and saving for retirement. Ashley asked her mom, Karen Love, a self-employed elder-care expert, where to go for advice. Karen had spent more than a year searching for her own financial planner until she found Mike Kalas, president of Potomac Financial, in McLean, Va., who suited her needs, income and personality. Karen introduced Ashley to Kalas, who agreed to meet with her daughter at no charge.

Kalas was impressed that Ashley had already bought her own home, built a substantial emergency fund and accumulated about $15,000 in retirement savings. He verified that a target-date fund was an appropriate investment for her IRA, and he suggested that she contribute a little each month to take advantage of dollar-cost averaging rather than dumping the maximum $5,000 in the account all at once before filing her taxes each year. Kalas reassured Ashley that she had made good decisions and was, indeed, on the right track.

It’s not uncommon for a financial planner to meet once or twice with a family member of a client -- even if that person doesn’t fit his typical client profile. In Ashley’s case, her retirement stash isn’t big enough yet to warrant ongoing investment advice.

Many financial advisers say they are reluctant to take on new clients who don’t have deep pockets. In fact, some are jettisoning smaller accounts or increasing fees in an attempt to keep pace with the rising cost of complying with new disclosure regulations. Starting this year, advisers must provide updated Form ADV Part 2 brochures written in plain English that describe their fees and other compensation arrangements, investment strategies, and any disciplinary actions. They are a must-read if you’re interviewing a prospective adviser.

Some investment advisers who charge clients an annual fee based on a percentage of their assets have increased their minimum for new clients. Several told Kiplinger’s that they lose money on smaller accounts, and if they boosted their fees to cover their costs, it would be almost impossible for those clients to earn investment returns high enough to offset the cost of their fees.

“Consumers have too few opportunities to get the independent, objective financial advice they need,” says Ric Edelman, a nationally recognized financial adviser, author and self-appointed champion of the middle class. “It’s astonishing that people with less than $500,000 in savings are often ignored by professional financial advisers,” he says. “It’s absurd and obscene, like a doctor who says he’ll only treat healthy, rich people.”

The minimum asset requirement for Edelman’s firm, which has offices in eight states and 15,000 clients around the country, is $50,000 per household. He says his firm often answers simple questions that can be tackled in a single free phone call, but charges a hefty 2% per year to manage investment accounts of $150,000 or less (the fee declines to 1.4% for $1 million accounts). Edelman concedes that the fee -- which amounts to $3,000 per year for a $150,000 account -- may seem high, but notes that there are no commissions or additional trading fees. When you add up the cost of advisory and investment fees elsewhere, you could pay three times as much, he says. “Don’t just ask about the fees,” he says. “Ask about the total cost.”

Mark Cortazzo, head of Macro Consulting Group, an adviser to high-net-worth clients in Parsippany, N.J., agrees that middle-income people need independent advice -- but thinks even 2% is too much to pay for investment management. He recently introduced Flat Fee Portfolios for investors anywhere in the country who are looking for quality asset management but who don’t need complex financial-planning advice. Investors can choose from among several model portfolios made up of low-cost mutual funds and exchange-traded funds, both domestic and international, for varying risk profiles. For a monthly fee of $199 for accounts of $250,000 or more (or $129 per month for smaller accounts), you’re assigned a dedicated adviser and receive periodic reviews. So, for example, the $2,388 annual cost for a $400,000 account works out to about 0.6% of assets for investment advice and asset management.

The portfolios are managed through an independent third-party custodian. “We’re using technology and model portfolios to provide a very efficient solution,” says Cortazzo. “It’s a ‘lite’ version of what we’re doing for our high-end clients.”

Broad advice for a price

Investing advice is an important part of financial planning, but it doesn’t address more mundane money decisions, such as whether to buy or lease a car, choose a 15- or 30-year mortgage, or experiment with a high-deductible health insurance plan paired with a health savings account.

For those routine financial matters, there are several Web sites that will connect you with a financial expert who can answer your question for a flat fee, usually about $150 to $240 per hour. Some simple questions may be answered for a fraction of that cost; others may require hours of work.

If you’re looking for a local adviser who charges by the hour, try the Garrett Planning Network. To find an expert, click on your state or enter your zip code. The results include bios, contact information, educational background and credentials. Select a planner and call or send an e-mail to set up an initial consultation, either in person or over the phone, and to get more details about the fee structure.

“Ongoing financial planning and investment management is overkill for most people,” says Sheryl Garrett, founder of the Garrett Planning Network. But an occasional checkup can be just what the doctor ordered. Garrett says many of her network members now offer two-hour in-person planning sessions that allow clients to cover as many issues as they want within that time limit. Sessions typically cost from $400 to $600. “You don’t need to get granular with everything, and you can still provide a whole lot of good direction,” she says. “Folks who are attracted to our services are more of the do-it-yourself mentality. They don’t want to give up control. They just want validation.”

Persuading many middle-income consumers that advice is worth paying for can be a challenge. “I have found that people are more interested in paying for advice from the psychic network -- where they charge you by the minute -- than they are for a financial planner,” says Susan John, president of the National Association of Personal Financial Advisors.

But that could change next year, when 401(k) plans must start sending quarterly notices to participants detailing how much they are paying in plan fees and fund expenses. It may be a shock, says John, but she hopes it will make individuals realize that investment and financial-advice services are not free. “I hope that disclosing 401(k) fees will have the effect of showing consumers that if they spend a little money for financial advice on the front end, they might save themselves a lot of time and trouble trying to fix a problem on the back end.”

Mary Beth Franklin
Former Senior Editor, Kiplinger's Personal Finance