I know of an elderly divorced woman who entrusted her life savings to her stockbroker -- not an unusual situation. Her broker held all of her money, including her most significant asset, an Individual Retirement Account (IRA). She implicitly trusted her broker who also acted as her investment adviser.

Like most, her broker received his income from commissions. He apparently had a relationship with investment companies offering certain mutual fund "products" which he pushed. All of his funds were "load funds," meaning that a sales charge was included in the markup of the fund price at the time of purchase or a markdown at the time of sale. His commission came out of that charge. Unfortunately -- and for reasons I cannot even now fathom -- this broker had all of this elderly client's hard earned assets in the most volatile of these mutual funds. As it turned out she was fully invested in high-flying technology stocks.

Then the 2001 bear market hit.

After weathering the storm for over a year and watching her investments decrease first by 20%, then 30%...and then 40%, the elderly client finally panicked and sold all of her shares. By that time she sold her mutual fund shares the value of her IRA was reduced by approximately half.

Uncannily (and, unfortunately, typically) she sold her mutual fund shares almost exactly at the market bottom. Had she waited another few years before cashing out she would have recouped virtually all of her losses. But she didn't, and in this debacle she lost half of her retirement "nest egg."

I am sure that this is not the only such story coming out of the 2001 bear market. I am even certain that there are many worse stories.

But it's an old story.

She probably believed that she was getting a "deal": Her investment advice was, after all, "free." Sure, she had to pay for a commission but she didn't actually have to write a check for the investment "advice." Paying a commission seemed less painful than wasting money by writing a check. And after all she was going to have to pay a commission anyway, right?

For this client, the decision to pay the commission was clearly "penny wise, dollar foolish." But it didn't have to be this way. She could have retained an independent financial planner to evaluate her financial condition as well as her goals. She would have experienced the benefits of hiring her own "fee only" financial planner. Even though she would have been charged by the hour, she would have experienced the many benefits and advantages of hiring her own expert:

• Independence. The financial planner would have been working for her, independently. She would have been "paying the freight," eliminating the inherent conflict of interest which occurs when the broker or advisor receives a commission or part of the sales charge.
• Objectivity. Fee only planners are not bound to offer a single group or series of mutual funds (or other investment products) but are free to give the best independent advice possible.

  Let's use an example as to why this is important: Most competent financial advisors would counsel their clients to develop an emergency fund of readily available cash. Because emergency money is not ordinarily best held in a mutual fund, but instead in a demand account at a local bank or credit union, would a commission-paid advisor have any incentive to recommend that a client start an emergency fund? Obviously, the answer is "no." Bank or credit union savings accounts do not generate commissions for the advisor.

  This is not to say that a stockbroker would never give good advice; there are many very good and competent brokers. However, as in most things, "follow the money trail." The broker would have a conflict of interest between the interests of his client ("she really should start an emergency fund") versus his own interests ("gee, I won't get paid if I don't sell something!").

  This is a perfect example of a conflict of interest.

• A "fiduciary" relationship. A fee planner or investment advisor is a "fiduciary" to his or her client. This means that the advisor has a legal and ethical obligation to act in the best interests of his or her client.

There are other advantages to hiring planners on an hourly or "task" basis. For instance, there are usually no minimum asset requirements. Also, the client can define the scope of the task given to the planner. For example, a planner might be hired to present a comprehensive financial plan; alternatively, the planner might be asked to do something more limited, like analyzing a specific need or problem such as setting up a college account or providing specific advice on retirement planning.

However, in the final analysis fee-only planners, paid on an hourly basis, are the "best deal around" for receiving independent financial advice.

And I am sure that if she could do it all over again, that elderly client would do things much differently.

You can meet your financial and estate planning goals! A licensed attorney and principal of the San Gabriel Valley financial planning firm Stratton Financial and Estate Planning, Larry D. Stratton is in a position to coach and advise you, and to help you plan for your future. He is also the senior associate at the law firm of Hausman & Sosa, LLP, located in Tarzana, California. Larry Stratton is a member of the Financial Planning Association, and speaks on estate and financial planning topics in Southern California.

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