Since my first experience with a financial adviser/planner, I’ve been rather leery of them in general. I do not mean for this piece to be an indictment of the group, but it is a warning to anyone who uses or seeks to use a professional financial adviser/planner.
The financial advising/planning (from here on I’m going to use ‘adviser’) is in large part a sales position. The adviser is there to help you reach some sort of personal financial goal you have for yourself, but he/she is also there to sell you a product. Is that product the best product for you to achieve your financial dreams?
Often times I have seen that products by the brokerage house or an affiliated company are pushed over other products. Why? It’s because you’re going to visit a sales person; they’re going to push their products ahead of the others. I understand that they must make a living, yet I find their tricks of the trade to be disingenuous and deceptive.
Advisers are placed in a position of “expert opinion.” If you knew more than the adviser, it’s doubtful you would go to see that person for advice. Since they are the expert, the client is likely to not question or not be able to fully question the validity or relevance of the advice, facts or other claims given by the adviser.
Perception can change the look of a landscape and it certainly can change your point of view when considering an issue. For instance, when an adviser states that your portfolio is outperforming the S&P 500 or the Dow, is that claim relevant? Often times it is not. Why? The relevant figure to quote when measuring a portfolio’s performance is the index that most resembles the mix of funds (or other holdings) in the portfolio. If I hold a large amount of very conservative funds and bonds, then the S&P 500 is not a relevant measure. By quoting an index that does not accurately reflect your portfolio’s holdings, the adviser is creating a false perception.
The spin does not stop with examples inline with the one given above. Since advisers often gravitate toward selling funds, all sorts of fees enter the picture. Funds often issue different classes of shares, which have different fee structures. Some share types charge fees up front, some upon exiting the fund and others charge higher annual fees to compensate for not charging an entry or exit fee.
In the arena of funds & fees, advisers often by-pass the objections to high up-front costs (front-load/A shares) by offering what is termed a “level load,” which is more often known as a class C share. Typically this class of fund investment charges 1% annually on top of the other fees a fund may charge. This type of fee structure can amass a huge cost for the long-term investor. Over the course of a number of years, this will actually be more expensive than the quoted up front fee.
The worst part about funds and fees is that you almost always can find funds that DO NOT CHARGE YOU a fee for buying into a specific fund. These no-load funds often outperform those with fees because the fees eat away at your investment’s return. Exchange Traded Funds (ETFs) are also a viable option. ETFs trade like stocks (Nominal trading fees apply depending on your brokerage…as would any stock transaction.)
I’ve seen a decent amount of deception first-hand with financial advisers. It’s something that angers me. I have enough of a knowledge base to see through their half-truths, but most people going to an adviser lack the knowledge to understand the deceptive tactics employed.
If you have some extra money that you’d like to invest in the stock market or in bonds, I would advise that you believe in yourself and open an online brokerage account. If you’re worried, start small. Most online accounts only require a nominal starting deposit. Look into no-load funds and ETFs. Intuitive research tools will help you find funds that are very specific or very broad in focus. Believe me, investing is not rocket science.
(Note: Since 2004 I have used Scottrade and have been very satisfied with their service, research tools and $7 trade commission fees. I am not employed by Scottrade nor am I receiving any compensation for making this claim.)