Not all financial advisors are created equal. Nor are their fees. The issue that you may need to discuss with your advisor is how they receive their fees and how that may affect whether they lean toward serving your best needs or theirs.
Are you aware that many advisors are not required to make the choice that is most financially beneficial to you? Want to know if yours is? Ask whether they are following the fiduciary standard or the suitability standard. Find that tough to ask? There’s that sticky stuff we feel around money.
Let’s start from the beginning.
- Many advisors at brokerage firms are paid commissions to sell you products that the firm makes money from.
- Some of these advisors are good. Unfortunately, many are just good sales people whose advice is influenced the commissions they get paid.
- What makes an advisor money may not be the best choice for you. It may cost you more to buy a product that is no better for you than one that would leave more money in your account (for college, retirement or whatever you are saving for).
You need to ask your advisor which standard they are operating under—fiduciary or suitability. The question might feel to them or you like an accusation because money seems to do that to questions. This is a very important question to get comfortable asking.
- The fiduciary standard for Registered Investment Advisors (RIA), or an ERISA appointed Fiduciary, requires that the advisor put your needs ahead of theirs. The fiduciary standard requires that you hear about lower-fee options, if the lower-fee product is of equal quality. Advisors who are fiduciaries must:
- Put the client’s best interest first.
- Act with prudence; that is, with the skill, diligence and good judgment of a professional.
- Not mislead clients; provide full and fair disclosure of all important facts.
- Avoid conflicts of interest. And if conflicts are unavoidable, they must fully disclose and fairly manage in the client’s favor.
- Broker dealers, insurance salespersons or any other financial company advisors are required to apply a suitability standard.
- They must know you and your financial situation.
- They must recommend products that are suitable for your situation.
- They can sell you products that result in them receiving a higher commission than for a comparable product.
If you’re not comfortable asking about fees and professional standards, you could lose a lot of money. The higher fees you pay may be invisible today, but result in dramatically less compounding over the time you own the stock, bonds, or other investment vehicles. Your discomfort may cause your portfolio to be worth thousands, or tens or hundreds of thousands less than it could be.
The other question you need to be able to ask is whether your advisors is fee only or fee based.
Fee-only advisors (look for RIA or ERISA) don’t sell products, don’t accept commissions and operate as fiduciaries.*
Fee-based advisors can sell you investment products for commission.
Again, discomfort in asking questions can cost you way too much!
- Watch an interview at the end of this article that I did with Gavin Morrisey about fees you may be paying your advisor that benefit him/her more than you—and what you can do.
Gavin is former Senior Vice President, Wealth Management at Commonwealth Financial Network and now managing partner at Financial Strategy Associates, a financial services firm in Needham, MA. He and his firm are independent, fee only advisors who will answer any and all your questions.
- Check out John Oliver Fiduciary and The Retirement Challenge on You Tube!
- Search the Web: There’s a lot of information how financial advisors get paid. In fact, that search led me to many interesting videos and articles.
Don’t avoid money or fee related conversations. If you want to talk with your advisor but feel uncomfortable, we can help you craft a conversation or email that is respectful and helps protect you.
Whether you’re an attorney, or other service professional thinking about raising fees, a dental office aware of the benefits for patients and your business if your team could talk more comfortably about costs, a parent who wishes he/she could talk with adult children about inheritance plans or family business, an adult child who fears approaching the conversation with parents for fear of seeming greedy, we can help you craft conversations that matter. Let us help you get more comfortable talking about money.
Kind of a P.S.
I know this article was long—and yet here’s more. More reasons to be wary. For those of you who have the bandwidth to keep going:
When I was doing research for this article, I came across these powerful and disturbing information-articles that highlighted kickbacks, contests, incentives for advisors. Here is just one of them. The bold is my emphasis.
From CNBC confessions from financial advisors Friday, 20 Jun 2014
Most investors know their financial advisors take a percentage for managing their portfolios, but they probably didn’t know the mutual fund industry is also giving these advisors commission for pushing specific equity mutual funds, unbeknownst to investors.
I’m not talking about front-end load fees. I’m referring to commissions and bonuses that financial planners get after they put their clients into these funds.
The industry and SEC call these payments “commission” but in reality, they are a “kickback” or “incentive” for financial planners to push specific equity funds, even if they are not in their client’s best interest. This payment structure raises ethical and legality concerns on whose interest is being served: the financial planner or the client.
Even more disconcerting, most investors don’t know this is happening.
I’ve seen how this works following two decades of working on Wall Street for well-known brokerage firms. This payment structure to financial planners is hidden behind a smokescreen that is covered by layers of payments through different sources. First to the brokerage houses, then to the brokers.
This hidden-fee structure was addressed in the Dodd-Frank reforms, which went into effect on January 1, 2014. Under Dodd-Frank, disclosures for “commission” or “kick-back fees” are now required for pension and 401k retirement accounts, but accounts that aren’t regulated by the Employee Retirement Income Security Act were excluded from the new law.