Is Your Financial Advisor Ripping You Off?
Would you ever want your doctor to be legally allowed to place their own financial interests over your personal well-being? That sounds absurd doesn’t it? Yet many of you are working with financial advisors that are doing exactly that, placing their own interests above your financial well-being — and it needs to stop!
I was hoping that after the dot-com bubble burst in 2001, the real estate crash of 2007 and the financial meltdown of 2008/09, the financial services industry would finally clean up its act. I thought maybe, since so many hard working people experienced financial devastation, we’d finally see increased transparency and frankly more pressure on financial advisors to do the right thing.
Instead, here we are in 2016 and we still have a system in which the vast majority of “financial advisors” out there are not legally bound to act in the best interest of their clients. Many investment professionals can call themselves financial advisors, but only a fraction are legally required to have your back. Hard to believe, but it’s true.
A long list of massive financial advice companies that are household names have a vested interest in keeping you in the dark. They’ve spent decades and billions of marketing dollars to prevent you from knowing what’s actually going on behind the curtains. It’s time to get educated, start asking questions, and take your financial well-being into your own hands.
Let’s talk about three of the most common ways advisors can put their interests in front of yours:
Many “financial advisors” work for broker-dealers and are commissioned agents. I know these people really well. Why? Because I used to be one of them.
Commissioned agents, who are legally allowed to call themselves financial advisors, sell products and get paid upfront and ongoing commissions. The upfront commissions are called loads and the ongoing commissions are called 12B-1 fees. That’s right, the jargon is designed to keep you in the dark and often times these commissions are never even discussed.
These advisors aren’t necessarily bad people, but they have sales quotas they need to hit and often-times bosses breathing down their necks telling them they’re not producing enough revenue. The fact is that they may be incentivized to do whatever it takes to make that next sale, regardless of whether that’s the best thing for the client.
The problem with commissions are two fold: 1) Since the advisor isn’t legally required to put your interests in front of their own, how can you be sure that you’re receiving unbiased advice that’s not driven by how much money the advisor can make? And 2) Once the commission is paid, the advisor may not have any financial skin in the game. So whether the investment does well or not, interests are no longer aligned because they already got their commission . Not good!
2. Hidden Fees
Ever heard of an internal expense ratio? There’s that jargon again. Every fund out there has something called an internal expense ratio associated with it. This is the annual cost paid by the investor to the money management company. These internal expenses can and do discretely eat away at your investment returns over time. This is money being pulled out of your pocket and you might not even know it’s happening unless you’ve read the fine print.
Consider the chart below which shows you the difference between a 1% annual fee and a 3% annual fee. Starting with $1 million, over a 30 year period you would have lost $2,177,157 to fees assuming a 6.5% annual rate of return. Wow!
Do you know how much you’re paying in total fees? I’m astonished at the number of people who have never bothered to ask their current advisor. There’s no other area in life that I can think of where people spend this much money by swiping their card while never bothering to ask the cost of the product. Yet, this is happening left and right in the world of financial advice and investing.
If you want a quick and easy way to assess how much you’re paying in fees, you can link your investment accounts to this free service for an in depth look.
3. Rigged Menu
Each advisory firm has a menu of investment products they’re able to offer (a.k.a. sell) to their clients. Guess which products are most likely to end up on your menu? That’s right — the ones that pay the highest commissions and have high ongoing costs paid by you. Advisors and their firms can profit a great deal by selling investments that are in their best interests, not yours. And it’s totally legal.
Even the process used by these companies to build their menu of investments can be shady. For example, in the case of high-cost mutual funds and insurance products, there are these people called “wholesalers” whose job it is to travel around convincing advisors to sell their company’s products. These wholesalers host dinners, throw parties, and take advisors to ballgames. This means that there are firms out there deciding which investment products to sell based on relationships rather than what’s the best deal for you.
How do I know this? Because there was a time when even I didn’t know what I didn’t know. I used to be one of those advisors working in a model designed to make me a lot of money while recommending investment products that weren’t in the best interests of my clients. I thought I was genuinely helping people, but I could have been recommending lower-cost investments that made a lot more sense for them.
And then one day a friend of mine who wasn’t even a financial advisor handed me a book that led me down an educational path and changed the way I viewed the industry. Eventually I learned that there is an entire group of advisors who are legally required to have your back. They’re called fiduciaries.
Fiduciary advisors have a moral, ethical and perhaps most importantly a legal duty to do what’s best for their clients at all times and in all situations. If you’re not working with a true fiduciary, let me say this loud and clear, your investment advisor may not have your best interest at heart.
I’m proud to call myself a fiduciary, fee-only CERTIFIED FINANCIAL PLANNER™ because I believe it’s the only way for clients to be absolutely sure that they’re receiving unbiased advice. The key-words to look for when searching for an advisor are “fiduciary” and “fee-only”. If you don’t see these terms, move on to another advisor.
If I can help you with your financial journey, please let me know. You can book a free consultation with me here. But even if you don’t work with me, here are three websites you can use to find a true fiduciary, fee-only financial advisor in your area:
Want to find out if your financial advisor truly has your back? Give them the “Do you truly have my back quiz?”
- Are you a legal fiduciary?
- Do you earn commissions for selling the funds in my portfolio? If so, how much?
- Are there other investments that may be less expensive for me to own?
- What is the average internal expense ratio of the funds I own?
- Do you receive ongoing commissions in the form of 12B-1 fees?
- Do you or your company earn commissions for selling me insurance products like annuities?
Christopher Girbes-Pierce CFP®
Founder & CEO
Enlightened Wealth Management, LLC