Wealth Management: Not Your Father's Advisor

As a kid, I was always looking for ways to make money. Those adventures included raising a vegetable garden to sell produce to neighbors, picking wild raspberries behind my house to sell at the end of our dirt road, and keeping score for the local church softball league. By my 12^th birthday, I had saved up $1,000. I knew my grandma had a stockbroker and I had big dreams. I approached her about buying stock.  She connected me with her stock broker who did her a favor and set an appointment with me. We arrived at a 10-story building in a city two towns over from my hometown. I took an elevator up to one of the top floors and sat down in front of the stockbroker in a three-piece suit behind an executive desk. At the time, I thought I was going to be an engineer. The stockbroker suggested I buy Fluor Corporation, a constructions and engineering firm. I was in the market! 

THE STOCKBROKER

Leading up to the 1980s, many investors used brokers to buy and sell stocks and other investments. The days of discount brokerages were not mainstream yet and the ability to buy stock online was not available. During this time, investors experienced the same thing I encountered as a kid. Stockbrokers wearing suits behind an executive desk on the top floor of the highest building in town researched stocks and recommended them to clients. They made money through trading commissions. The more they traded, the more money they made. As a result, investors would receive a phone call occasionally to buy additional stock or change investments. Looking back, this created a conflict of interest, but this was the way the industry worked.

THE COMMISSIONED BASED FINANCIAL ADVISOR

Starting in the 1980s into the ‘90s, commission-based financial advisors gained traction. They provided different experiences depending on what investors were trying to accomplish. In some situations, advisors would simply put investors in mutual funds. In other instances, advisors provided financial planning and invested in mutual funds based on asset allocation recommendations. Advisors received commissions based on the products sold and the amount of money placed into each product. 

Recommending high-commissioned life insurance and annuity products became popular among advisors – the reasons are obvious. Although the services were an improvement from the classic stockbroker, there still remained a conflict of interest between advisors and clients. Among other things, a lack of fee transparency existed that was not fair to the client. Amazingly, this outdated commissioned based advisor model still is extremely prevalent in the industry today. The investment industry is an ocean liner which is slow to change direction and investors using commission-based advisors do not know any better.

FEE-ONLY WEALTH MANAGEMENT ADVISOR

The financial services industry is slowly changing to a fee-only advisor model as the public becomes aware of the disadvantages of previous models.  A fee-only advisor is typically an independent Certified Financial Planner (CFP®) focused on comprehensive financial planning and asset management. A fee-only advisor charges a small percentage based on assets under management. This aligns both client and advisor goals together, mitigates conflicts of interest, provides transparency and eliminates pressure on advisors to sell proprietary funds. Traditional, large investment firms have tried to implement this model, but often still offer incentives with bonuses and trips for selling quotas of certain products.  As the financial industry slowly shifts, smart investors are ahead of the curve working with fee-only advisors.

THE STAKES ARE TOO HIGH

In Thomas Gray’s 1942 poem Ode on a Distant Prospect of Eton College, he wrote, “Where ignorance is bliss, ‘tis folly to be wise.”

Ignorance can be bliss, but with financial dreams, the stakes are too high. Investors need to educate themselves, because the large, traditional financial institutions will not educate the public. Investors want an advisor with aligned goals and transparent fees, but they must not be complacent. It is easy for investors to be complacent when they only know the way it has always been and not what it could be.  As the financial industry ship slowly turns in the right direction, smart investors are jumping off to take control of their financial future to the new wave of advisor.