When it comes to getting good, unbiased financial advice, do you know where to turn? And are you confident that the fees you’re paying justify the service your financial planner is providing for you? It turns out, based on this recent column we read on MarketWatch, that even savvy investors can find themselves paying exorbitant fees for bad advice – advice that can cost them thousands in unnecessary taxes and substandard returns on their investments. Even for the majority of us with relatively modest-sized retirement portfolios, this column, written by retirement expert and author Chris Mamula, sounds an important alarm, warning us against trusting our financial adviser too blindly.
“I began writing about personal finance to create a positive outlet for the anger, regret, and pain I experienced because of investing mistakes I made as a young professional,” Mamula begins his column. As he explains, he became a consumer advocate “to help others avoid repeating my mistakes” – errors which, he explains, “were the result of blindly following the advice of a financial adviser without performing due diligence.” By Mamula’s estimation, the self-serving advice of his adviser ended up costing thousands in unnecessary fees and taxes. “Compound the effects of these mistakes over decades,” he writes ruefully, “and this was literally a million-dollar mistake.”
Are all financial advisers bad people who are out to fleece their clients? Of course not, and that’s not what Mamula in his MarketWatch article is saying. Here at AgingOptions we agree that many men and women in the field of financial counseling and investment services perform an invaluable function every day for their clients who rely on their honesty, advice and expertise. The problem, Mamula suggests, is that there are a limited number of ways for financial advisers to earn a living, and in virtually every scenario, there are potential conflicts of interest in which the benefit to the adviser and the benefit to the client of any financial strategy or purchase clash. “I strongly recommend that you understand that financial advice comes with inherent conflicts of interest,” writes Mamula. “As a consumer, you must understand what these conflicts are, so you can make good decisions and protect your interests.”
Three Types of Compensation
The article provides a helpful overview of how financial advisers and planners are paid. “There are essentially three models to compensate advisers, says Mamula in MarketWatch. “You can pay for financial advice through commissions on products you buy. You can pay as a percentage of assets under management. Or you can pay a direct fee for financial advice. Each comes with unique upsides, downsides and conflicts.”
- Commissions: Here the adviser receives a sales commission on the financial products you buy. Mamula says that for most middle-income clients, commission-based financial advice is the most common. However, he adds, “The conflicts of interest are obvious. A financial adviser paid by commissions is really a salesman of investment products.” That means you have no way of knowing if the adviser is basing his or her financial recommendation on what’s best for you or on which firm pays the biggest bonus.
- Assets Under Management: In this common model the financial planner is paid a percentage based on the amount of your money he or she is managing. Proponents claim this model eliminates conflicts of interest: “Because advisers are paid a percentage of the wealth you accumulate,” says Mamula, “they claim an adviser’s interests are aligned with the investor’s, because both a client and adviser benefit when wealth grows.” But, he adds, “I disagree.” The problem here is that advisers are paid to keep your money under their management, not necessarily to advise you objectively. What if your funds might be better invested elsewhere? “There is incentive [under this model] for the adviser not to rock the boat. Remember, they get paid for having assets under management, not for giving good advice.”
- Fee Only: “The third model,” says Mamula in MarketWatch, “is paying a fee only for advice you receive. This is the most transparent model” because you are paying pre-determined fees directly to the planner. While you might think that the fee method of compensation eliminates most conflicts of interest, it’s not a perfect system, because advisers don’t earn as much if they keep things simple. “The problem with paying for investing advice is the incentive it creates to make things complicated,” Mamula warns. “Unnecessary complexity is common in the financial industry. Making investing complex is a way for the financial industry to justify their existence” by forcing clients to rely on them to keep everything straight.
Compensation Can Mean Conflict
The point, Mamula reminds us, is to assume that all financial advice comes with inherent conflicts of interest. “If you plan to seek investment help, you need to understand how your financial adviser is paid and the conflicts this can create. Go in with your eyes wide open or your vision may soon be further obscured when storm clouds start forming.”
Here at AgingOptions, we think this is sound advice, but we would take it a step farther. As Rajiv Nagaich puts it, there’s a big difference between the process of getting good advice and the process of implementing that advice. “Advice, especially financial advice, should be about getting to the how-to answers,” Nagaich says. “Then, once your strategy is clear, you can seek out the least expensive options to put that strategy to work.” By employing low-cost, low-frills firms like Vanguard or Charles Schwab, even a relatively inexperienced investor can put his or her retirement funds to work without incurring the burden of unnecessary fees, commissions and taxes. “There’s no need to pay a so-called professional for financial transactions most average retirees can manage for themselves,” Rajiv suggests.
Much More Than Money
If there’s one area where good, comprehensive advice is absolutely necessary, it’s in the area if retirement planning, where there’s far more at stake than simply worrying about money. You also need to protect yourself and your estate legally and medically. You need to prepare carefully for your present and future housing needs. You need to ensure that your family is aware of your desires and will support their implementation. The only way we know of to build a plan that encompasses all these facets is with a LifePlan from AgingOptions. A LifePlan truly becomes your road map to fruitfulness and security in all aspects of your retirement future.
We invite you to come join Rajiv Nagaich at one of our free LifePlanning Seminars. Do what thousands have done and invest just a few hours with Rajiv, and we assure you, you’ll never look at retirement planning the same way again. For a complete listing of currently-scheduled seminars, visit our Live Events page. We’ll look forward to meeting you soon at an AgingOptions LifePlanning Seminar with Rajiv Nagaich.
(originally reported at www.marketwatch.com)