In today’s uncertain economy, having a qualified financial advisor is more important than ever. Most consumers hope that the information they receive from their financial advisor is accurate, up-to-date and trustworthy. While we hope that is the case, sometimes “so-called” advisors, working for large brokerage firms, insurance companies or commission-based, financial planning firms have big secrets that they don’t want you to know – secrets that, if the consumer was aware, might make them consider finding a second opinion! Below is a list of five things your financial advisor does not want you to know.
Secret #1 – How They Get Paid
Almost all financial advisors get paid on commission. This means that if they recommend a product and the client buys their recommendation, the advisor makes money. Further, advisors receive perks, such as trips, bonuses, dinners and other extras. The sad fact is, unless your advisor is fee-only (meaning they do not make anything if their client buys one of their product recommendations), you cannot completely trust the advice they are giving, because everything you do affects the amount of money they make.
Secret #2 – How They Make Recommendations
Often, consumers are under the impression that their advisor has special “insider information” that gives them the credentials to offer investment advice. The plain fact is they don’t. Typically, the information given to clients is provided to the advisor from someone higher up in the organization. Sometimes these tips are excellent deals that can be of great benefit to the consumer. However, many times the advice is based on products that need to be pushed because of inventory or other factors that benefit the brokerage firm or insurance company, but not always the consumer.
Secret #3 – Hidden Costs
Advisors don’t want you to know that they have hidden costs attached to their recommendations. The bottom line is that they need to make money. One of the easiest ways to do this is to lead the investor to believe they have purchased a stock or financial product at the best price available. The consumer is unaware that in addition to the actual cost of the product being sold, a profit for the firm is built into the sale price. These additional costs can include fees, commissions, kickbacks and other extraneous profits for the firm or advisor. Furthermore, some products, such as annuities, have additional fees included, for instance the mortality and expense fee. This fee is charged by the insurance company to cover the costs of death benefits as well as insurance income guarantees that are provided in the annuity contract and commissions.
Secret #4 – They Don’t Work For You
It is sad to say, but your advisor is not actually “your” advisor. While they are always there to offer suggestions and ideas, they are not employed by the consumer. At the end of the day, the job of a commission or fee-based financial advisor is to make money for themselves.
Secret #5 – How Little They “Actually” Work
Good financial advisors do very well for themselves. The commissions earned by a fee-based financial planner are very high in comparison to the amount of work that actually takes place. Typically, their plan is to sell what the brokerage or insurance firm recommends. The sad part of this equation is that without a well thought-out plan for the future, they can make mistakes at the expense of their customers, but to the benefit of their employer.
So what can you do to avoid these pitfalls and create a solid plan for the future? First of all, you need to ask your financial advisor some tough questions. Ask are you a fee-only or fee-based planner? If they are fee-based, then ask for a written statement of all compensation for the advisor and the firm. Be sure it states that there is no other compensation. If you choose to work with a fee or commission-based financial advisor, do your homework and ask them questions such as, “what fees are included,” “where did you get this information,” ”are you a certified financial planner” and “what is the long term plan for my financial future.” Additionally take the time to ask them for references and see if they will supply a written statement attesting to the fact that they are a fee-only financial planner. If they don’t give you answers that make you comfortable, consider conducting some research to find the best fee-only advisor in your area. The National Association of Personal Financial Advisors (NAPFA) is an excellent place to start this research ( www.napfa.org ). In the end, the important thing to remember is you must have a solid plan. Without one, you could make some very costly mistakes.