Who Is Your Advisor Working For?

“A man always has two reasons for doing anything:  a good reason and the real reason.”  – J.P. Morgan

Motives matter.  In hiring a financial advisor, it is important to understand how they are compensated.  Financial advisors are not all created equal.  Advisor compensation should be a huge consideration when selecting someone to manage your money.

In a nut shell, when you engage an advisor to manage your nest egg, you are either engaging a fee-only advisor, or a commission based advisor…or you may have a combination of both.  They may be a money manager, broker, or insurance agent.  Brokers and insurances agents are largely paid by commissions.  Meaning they are paid to sell and produce for their firms.  They may have the title of financial advisor or CFP or CLU, but at the end of the day, they are sales people.  Their firms give them products to sell, tell them what to say and how to say it, and then they go out and try to sell clients.

A broker may place you into a mutual fund that pays him or her commission..either upfront or on a trailing basis.  The broker may also call you periodically with “ideas” like selling you a stock that their company wants promoted.  A broker may do both of the above and also place you into a high fee wrap account…meaning an account in which their firm contracts a seperate account manager to buy and sell stocks on “your behalf” and then that manager shares a portion of the management fee with the broker who placed you into the account.  Wrap accounts are notoriously used by brokers to provide the image to the client that they are indeed fee-only as well.  However, the fees are typically pretty expensive!

An Insurance agent typically sells you annuities or life insurance.  Some of these products pay 8% to 10% commissions on the initial sale or the agent may specify to the insurance company that they would like their commission spread out over the life of the contract.  Currently, Fixed Indexed Annuities are the hot tickets.

Both of these models make me very uncomfortable.  Why?  There can be or is an underlying lucrative incentive to advise you on where to place your money.  Conflict of interest comes into play.

The model that we prefer and actually use at Rich Investments is a FEE-ONLY MODEL.  Meaning, our clients pay us a fee, every quarter, based on the size of their account (s).  We are not compensated by the investments that we are selecting for our clients.  We work directly for our clients.  The SEC (Securities and Exchange Commission) mandates that we must operate in a fiduciary repsonsibily to our clients…we must operate in our clients best interests.  We must also disclose any potential conflict of interest to our clients before they do business with us….and while they are doing business with us.  Consequently, we do not have to call our clients with “ideas” or “hot stock tips” and get our clients to give us permission to trade or sell them something.  No corporate headquarters or investment banking relationship influencing our investment picks.

So ask your advisor how much money he or she makes on your account.  Demand they show you.  We actually send out a quarterly invoice every quarter showing in black and white what are clients are paying for our services.  Nothing is hidden.  If you are in mutual funds, ask you advisor how much he or she was paid when they placed your money into them.  If you are in stocks, ask you advisor how he or she is compensated when they make their recommendations or place you into a separate managed account (wrap account).  If you are in an annuity or being encouraged to invest in an annuity, find out what the commission is.

DON’T END UP LIKE DR. JACOBS IN THE VIDEO ABOVE!