How do you find objective financial advisers? Believe it or not, you really need to know something about how financial advisers operate and how compensated before you can make a good decision on the right adviser.
I think people tend to think all financial advisers are objective and have our best interests in mind, but unfortunately, it’s not always the case. Some advisers are commission based. In other words, they’re compensated based on the products they sell you. Others are fee-only which is unrelated to the financial products and focused on their services alone. The bottom line is some advisers operate with the intent of selling you products versus focusing on helping you with your plan.
To learn more about the industry I decided to ask my friend John Gay with Frisco Financial Planning a few related questions. I hope you’ll find these informative and helpful when considering the services your financial adviser is offering you, or when seeking the help of a financial adviser.
John has been advising individuals on financial planning issues for over fifteen years. He is a member of Kingdom Advisors which is an organization of financial professionals dedicated to serving Christ through the ministry and profession of financial planning guided by biblical principles. I recommend checking out John’s blog and website to learn more and get regular blog updates.
How can you get objective advice when working with a financial adviser?
It’s unfortunate, but you really have to follow the money. Commission-based advisers are unable to recommend the full universe of financial products and their compensation can vary depending on which product they sell. Not good. Advisers who are employed by Wall Street firms are paid by the firm, not by you, so it is ultimately their employer who they answer to. Independent, fee-only advisers who are paid solely and directly by their clients and independently of the recommended product represent the most objective advice possible.
Why is the financial advice delivery system diseased?
You have companies that manufacture, distribute, and advise on products of their own creation. That’s like doctors getting paid based on the number of pills they prescribe you. There’s a reason that people are fed up with the financial industry and why they are so skeptical of Wall Street firms, banks, and insurance companies: it’s because these companies have created expensive, risky, dangerous investment products and sold them to consumers under false pretenses.
Can you explain the diagram on your website?
There is an alternative. By working with an independent, fee-only adviser, you can separate the advice component from the product manufacturing component. This gives you an objective and knowledgeable third party with no agenda who is on your side to help you evaluate which financial product (investment fund, insurance policy, etc), if any, is appropriate for you.
How can novice investors avoid paying high priced commissions?
You have to do some homework but you don’t have to be an expert, nor do you have to devote your life to researching investments. Decide if you feel you have the time, inclination, and interest to devote to “doing it yourself.” If so, seek out the best books, read them, and ignore virtually all media (TV, magazines, newspapers). If not, invest some time in finding an experienced, independent, fee-only adviser. NAPFA is a good place to start. Be prepared to sort through some advisers that may not be a good fit for you.
What is the difference between financial planners who recieve fees from investors vs. commissions or pay from financial institutions?
In addition to the conflicts noted above, Wall Street firms usually put a greater emphasis on sales rather than professional advice (brokers are referred to as “producers” and those who generate big commissions are the ones who get promoted, win trips to Hawaii, etc). Financial planning and investments are not used cars; you want to work with someone who treats their work as a profession like medicine or law.
How do you know when you’re working with a sales person versus someone who is a true adviser willing to partner and help you achieve your objectives?
Ask them how they are paid. If it takes them longer than 30 seconds to give you an easy, clear, and complete picture of what you’ll pay to work with them they are probably a salesperson. If you walk away saying to yourself “that just didn’t feel right… what wasn’t he telling me?” they are probably a salesperson. If their business card says “securities offered by ______________” they are probably a salesperson. If they find you instead of the other way around, they are probably a salesperson. Look around his office; do you see a “high overhead” operation? If so, they are probably a salesperson.