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.)
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Have you ever read Ron Paul’s End The Fed book? I think you’d like it.
James
Breathalyser Game
21st Birthday Ideas
Dear Writer: If you have had the unfortunate experience of meeting with a purported financial advisor that has attempted to “plan” anything for you financially without first seeking to attain a very indepth and comprehensive understanding of your specific life style, and current situational aspects, e.g.; income, debt, savings, liabilities, near, mid, and long term needs, personal, familial, and extended family responsibilities, retirement planninng, legal needs, college needs, and more. Then you certainly were not speaking with a financial planner with your fiduciary interests as priority. A professional advisor is a highly ethical individual that holds to an intrinsic standard of improving his or her clients life by effecting specifically tailored strategies for time critical life needs and goals. A highly supportive role in financial advising also entails assistance from attorneys and accountants, and very possibly family members and medical professionals. Advisors that are independent of the big wirehouses and banks have no particular product to peddle. Often times it is not unusual for clients to only need a “map” and guidance. Fees for advice only have now become more acceptable and rationale for many seeking assistance. The industry is in flux and changing for the benefit of all. Clearer and stricter regulations will be in place by year’s end and will significantly diminish product pushers who are transactional sellers and not fidiciaries.
Hi Leon. Thanks for your input. My main exposure to financial advisers has been through sitting in on meetings with advisers of my family members. In those cases I often felt that the advisers did a poor job of explaining industry terminology and did not fully explain the difference in fund fee structures. Also, using irrelevant indices to compare portfolio performance against was common. It’s one of those situations where you can’t say someone is lying, but it’s what has been left unsaid that is significant. I was brought along to be able to ask questions, which would not be asked by someone not familiar with various investing instruments.
In graduate school I spent time as an intern with Ameriprise Financial. While I did not sit in on meetings with clients, from what I could tell, the level of engagement that I saw from the advisers I was doing research for indicated to me that a better client-adviser relationship existed.
Dear Writer. Leon is on to something. I have been president of two bank- based brokerages and now work with an independent SEC registered investment advisor.”Brokers” and “advisors” should not be confused- although many brokers like to refer to themselves as advisors. Brokers have to recommend “suitable” investments, which can range over a wide array of products. True advisors have a “fiduciary” standard to meet which is a much higher standard than mere suitability. Most fee- based advisors never receive compensation in any way from the products they recommend to the client, nor should they. This is the question you need to ask your “advisor”: “Do you receive income from any source other than the fees paid by your clients?” The answer to that question will tell you how much caution you should employ when weighing the subsequent advice. Better yet, if the answer is “Yes”, take your business somewhere else. Different people have differing levels of education and experience. While the discount brokers are very good for those who have the background and time to study the markets and individual securities in making their own decisions, many folks with significant investable funds either are too busy or inexperienced in the markets to do this safely for themselves. They should seek a trustworthy advisor to manage their funds- in my opinion.
Alan, thank you for sharing your insight.
Maybe you can help shed light on a few thoughts your post has brought to mind…First, how does one distinguish a broker from an adviser? Is it dependent upon the role the client places them in? For instance, if you go to a CFP, but are not seeking financial planning services, but rather are only looking for direction as to where you should place X dollars, is the CFP a broker to you rather than a financial adviser? Where/How is the distinction made?
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Couple of ways. First, generally speaking, most CFPs act as an advisor, but there is nothing that says they can’t be a broker. It’s all about how they are paid. A person that is selling you a product and is paid by commission or mark- up is acting as a broker, no matter what he wants to call himself or what title is behind the name. You can learn lots about an adviser or broker at the SEC’s investor website, http://www.investor.gov. My personal preference is to find an independent, fee- only, employee- owned SEC registered investment advisor. By doing this, you eliminate conflicts of interest. If the company is publicly traded, there is constant pressure from Wall St. and the Board to make evermore profits, which could potentially affect the service profile provided to the client. An employee owned firm does not face this pressure. If the partners are satisfied with the income from their fees, that is the end of the story. Lastly, always look at your advisor’s personal experience and training levels. You want someone who has “been there before” handling your money. Again, most of this information can be found through the SEC’s site or your state securities authority.
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