In our final post on the subject it’s time to understand which financial advisors you should avoid, and how to find them.
It seems like everyone these days is calling themselves a financial advisor.
There’s everything from bloggers talking about retiring early or radio pundits, to insurance agents calling themselves full financial planners or “money coaches.”
It’s no wonder it’s confusing.
Probably the most common thing we run into is someone who recommends almost nothing but annuities (AKA an insurance agent), but calls himself a financial planner when in reality they’re anything but.
Which would you rather have?
An insurance agent who only sells insurance or annuities…
…or a financial advisor who’s legal obligation is to put your interests first?
When we tell people the difference, they usually request the latter.
That’s why it’s imperative that you learn to tell them apart, so you can know which ones to seek out and which ones to avoid.
The issue is simple: commission.
Some products pay far more commissions to an “advisor” than others.
Naturally, an advisor who bases their income on how much commission they generate will lean towards those products.
We met a lady whose late husband had been sold over a dozen different annuities.
Here’s why: Each of these annuities has a 10% free withdrawal privilege each year. This allowed her husband to take out 10% per year and do whatever he wanted with it.
What did the advisor recommend?
He recommended taking that 10% from each annuity, every year and using it to buy a new annuity…
It didn’t matter that the new annuity carried a brand-new, decade long surrender charge or that the client would now lose access to their money.
Do you think that was really in the best interest of the client?
To help you out to make sure you can tell different types of advisors apart, here are a few things to look for.
Earlier in our series, we have talked repeatedly about the word, “fiduciary.”
This is a great place to start.
Someone who is acting as a true fiduciary is going to have a really tough time justifying a high built-in commission.
In addition, insurance companies can hide their commissions so it’s hard to know they are there, let alone who actually ends up paying them.
It’s quite simple.
You do.
The insurance company isn’t going to take money out of its pocket to pay the advisor. That would hurt their bottom line.
So, whose bottom line do they want to impact?
Just because a salesperson isn’t a fiduciary, doesn’t by itself mean you can’t trust them.
For example, car salesmen aren’t fiduciaries.
Not all of them are out to harm the consumer. Likewise, there are good, ethical insurance agents.
People need life insurance…in some cases.
The problem is when you the only tool you have is a hammer…everything looks like a nail.
So you need to be able to determine who is actually a broad based financial advisor and who is just a guy with a hammer looking to solve every problem one way.
The first way to determine this is to look at their licenses.
If all a “financial advisor” has is an insurance license, then that’s all he can sell you. I would avoid people who call themselves advisors who can only sell one type of product.
If you look deeper into the licenses a person holds, you get more insight into their structure and what they can sell.
For example, someone who holds a series 6 or 7 license is going to be a commission based broker, whereas someone who holds a series 66 is going to be fee based.
Again, those advisors who are commission based are held to a different standard of what they can sell you as opposed to those who are fee based. They also have different incentives.
The company an advisor works for also tells you something about him.
For example, someone who works for Northwestern Mutual is likely going to recommend Northwestern Mutual products over anyone else’s.
This is also the case in many big names such as Merrill Lynch.
I had an account with them when I was in college. All they recommended were Merrill Lynch branded mutual funds.
Banks are often the same way.
There is no one company that has the best products in all the different sectors of investing. If there were, no other companies would exist!
So why would you lock yourself into one brand of products by choosing an advisor who works for a company that has its own products?
That’s a clear conflict of interest on the part of that advisor.
In the end, remember the tips we went over in the entire series:
- Do your research.
- Understand the Designations
- Ask the right questions.
- Decide if you really need an advisor in the first place!
- And make sure to avoid anyone with a conflict of interest to your future.
Hopefully these tips will help you feel more confident in choosing the right financial advisor for you.
And if you want to see how we think a financial advisor interview should, then interview us and then go meet a few others.
If they pressure you and don’t allow you to go home and think about it, before making a decision?
Then maybe it’s time to work with someone who will.
Sincerely,
Alex Parrs