5 Things Your Advisor Will Never Tell You
What you don’t know could hurt you, and frankly, the stakes are simply too high not to ask
Financial advisors have a lot to say. They may tell you about the past performance of a fund or use financial jargon to explain a concept. They may talk about the rich tradition of their company or discuss your financial goals. There are also many different types of advisors. There are independent fee-only advisors and there are commission-based advisors. There are advisors who service thousands of clients for huge mutual fund companies and there are advisors who work for big brokerages with traditional “Wall Street” firms. They may also go by different names including wealth management advisors or financial planners with titles ranging from personal financial advisor to vice president. With all this variety, what you don’t know, could hurt you, and frankly, the stakes are simply too high not to ask. Here are some of the unmentionables to beware of.
“I AM NOT A FIDUCIARY”
A fiduciary is a person who has the power and responsibility of acting for another in their best interest which requires total trust, good faith and brutal honesty. While investors may like and trust their investment professional, most advisors are not required to act as fiduciaries. This may come as a surprise to many who just assume their advisor is required to act in their best interest, when, in fact, most advisors are held to a much lower “suitability” standard. Investors can find investment professionals held to a fiduciary standard in the form of Registered Investment Advisors who typically operate as independent, fee-only advisors. Asking your financial advisor if they are a fiduciary is important because you will never hear them offer, “I am not required to work in your best interest.”
“I AM SELLING YOU THIS PRODUCT TO MAKE A HUGE COMMISSION”
It is important to understand advisors get paid with different fee structures. A fee-only advisor receives income based on assets under management which aligns the client with the advisor and provides transparency. A commissioned-based advisor receives income based on the products they sell. They may receive various amounts of income based on the brand of mutual fund they sell and the fees associated with those mutual funds. A commissioned-based advisor also receives vastly different commissions depending on the type of product they sell. One of the products that produces the highest commission is an annuity. A $100,000 annuity sold to a client by a financial advisor can produce an up-front commission of $8,000. Now there are disclosure requirements, but these are often quickly swept aside. An advisor may tout the benefits of an annuity, but the client will never hear, “I am selling you this annuity to make a huge commission.”
“I NOW GET TO TAKE MY FAMILY TO HAWAII”
Traditional big brokerages have complex fee structures that can include fee-only and commissioned-based products. They also include incentives with bonuses and trips if advisors meet sales goals in certain products being promoted by corporate headquarters. While it happens in the industry, an advisor will never say to their client, “Now that I’ve invested your money in this managed product and met my sales goal, I qualify for an amazing vacation.”
“I HAVEN’T LOOKED AT YOUR ACCOUNT IN YEARS”
To combat the outflow of assets, large “mutual fund” companies started to offer free wealth management advisors to clients with higher accumulations. While some service is better than none, you get what you pay for. These wealth management advisors are asked to cover thousands of clients and scramble to offer personalized service. They rely on previous notes to remember clients and provide reactive asset management. When you call your free wealth management advisor they will never say, “Let me catch up, I haven’t looked at your account in years.”
“YOU HAVE HUGE INTERNAL EXPENSE FEES”
Common investment tools for financial advisors include mutual funds, exchange traded funds and annuities. Each one of these investments have internal fees that investors unknowingly pay. These fees are hidden in the fund prospectuses and quietly eat away at returns. Good advisors will use high quality, low cost investments that align with the client’s goals. Others use high cost investments unaware or not caring about the high fees taken on by their clients. In most cases, advisors keep quiet about the internal expense ratios and fees. Advisors who use high cost investments will never tell their clients, “You have huge internal expense fees which lower your returns.”
“IGNORANCE IS NOT BLISS”
With investing, what is not known can cost money, market return, and financial dreams. Asking your financial professional questions to understand compensation and the reasons for recommendations is an important step to financial success.
As billionaire investor Warren Buffett said:
A few simple questions, some research, and common sense may be worth a lifetime of savings.