There’s no such things as a free lunch. If someone tells you that you’re getting something for free, then think again. They’re getting something out of it whether it’s monetary value or non-monetary value. I can’t think of a situation in which you should believe that a financial services professional is giving you something for free. Even if they simply buy you lunch, it’s because they want to get to know you better or they want you to become a client or some other reason. In exchange for a “free” lunch you gave them your time, energy, and conversation. That’s not free.
I’m passionate about financial planning because it’s a profession that allows me to put my skills to work helping others in an area of life that most people can use help. Although I know I stray from this line of thought often, I was raised to always try to put others first and think of them before considering my own wants and needs. Unfortunately, it seems that there are many others in the financial services industry who consider their own wants and needs before thinking of their clients.
Don’t Be Left In The Dark
The reason I’m writing this is due to two separate situations that I’ve been made aware of recently. One of the situations is something that someone I work with discovered when combing through a new client’s information from their previous financial advisor and one is something that a friend found when exploring a new client’s financial information from a former advisor. Both show how easy it is for investors to be left in the dark if they’re not working with someone trustworthy.
The first situation that I mentioned above is something that my boss found when reviewing a new client’s Indiana CollegeChoice 529 Savings Plans that were setup for them by a financial advisor who works for a financial services firm with a household name. It’s great that the clients have these plans in place and are already saving for college for their young children, but this was an “Advisor” plan rather than a “Direct” plan. This means that the financial advisor set up the plan for the clients and managed the investments within the plan rather than the client setting up the plan themselves and choosing the investments.
The clients were being charged 4.75% on every single deposit they made into the accounts, and that was after receiving a discount from the 5.5% othey were being charged prior to account hitting a certain balance. What a deal.
That’s insane. They had no idea.
This is something that we don’t even charge for at the company that I work at because there isn’t very much value that we can add to managing 529s. We help clients setup a “Direct” account and tell them which investment to choose. There’s not a whole lot more to a 529 than that although the example above seems to indicate that there are other financial services firms that think so.
Free Account
The second situation is one that one of my friends came across when reviewing information for a prospective client. The client’s current financial advisor told her that her account is free with no annual fee. (Remember our discussion about free above?)
Notice how the message was framed to her. “The account is free with no annual fee.”
Technically, she isn’t paying an annual fee for the account. What she is paying is the up to 5.75% up-front commission on all of the mutual funds she purchases within the account in addition to the ongoing expense ratios on the mutual funds, one of which is 5.5%. Most are at least 1.2%.
I can imagine where most of the money being made off of that “free” account is going.
Know Who You’re Working With
Just because your friend or family member got a new job as a financial advisor where they’re required to sell products and they start with pitching them to their friends and family doesn’t mean that you have to, or should, work with them. Isn’t it kind of scary how easy it is for someone with no financial experience to get a position like that which could have significance long-term consequences on those they’re selling to?
I’m very fortunate to have a degree in financial planning and to have learned about all aspects of the financial services industry. Most who work within the industry haven’t been fortunate enough to experience this type of education and be exposed to all the different sides of the industry and how each is compensated.
I believe that some people who are selling these awful financial products to others genuinely believe that they’re doing a great job helping them and that they’re doing something good for the client. I think a lot of financial salespeople don’t even know that there’s another side of the industry and that there’s an option to always work as a fiduciary in the client’s best interest. They’ve simply been told that they have an opportunity for a solid job with high income potential and that’s the extent of their knowledge on the industry.
Unfortunately, there are those who know about all sides of the industry and know that there are better options for their clients but are more motivated by continuing to line their own pockets. Oftentimes people who works at these types of firms are simply salespeople who passed basic level securities exams to keep them out of prison, not educate them on financial planning. Many have no background or previous experience in finance or financial planning. It may be harsh, but it’s true.
Eliminate Conflicts of Interest
Stories like those above demonstrate exactly why I chose to work at a fee-only, independent RIA and not sell products or be paid on commission. Commission-based advisors inherently operate under a conflict of interest. No matter what product is best for your situation, they’re incentivized to sell you the one that makes them the most money, pays their mortgage, and feeds their family.
Maybe now you’re even more paranoid to work with a financial planner because of these stories. Or (hopefully) you’re more motivated to audit your current financial professional’s recommendations and the things that you’ve implemented in your own financial life. Either way, here are some things that you can do to help make sure that you’re working with someone who is obligated to always work in your best interest. I’ll repeat a few of them below.
- Work with a CFP professional
- Work with a NAPFA-Registered Financial Advisor
- Ask them if they act as a fiduciary for you at all times
