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The financial advice business is riddled with conflicts of interest, hidden fees, and financial incentives that can cost you dearly if you don't know how to protect yourself.
This is not some crazy conspiracy theory. It is just the way the business works. It is baked in the cake.
In a nutshell, you represent a pile of money to investment sales companies. The bigger the pile you have (net worth), the more attractive you are as a client. They are trying to make money off your money, and you are trying to make money off your money. It is an inherent conflict of interest.
This doesn't mean all brokers and advisors are bad apples. Quite the opposite is true. There are many wonderful people in the investment business doing their level best to serve you. Unfortunately, it is very difficult for you to understand all the problems lurking behind the scenes let alone defend your nest egg from potential wrongdoing.
It's not your fault. After all, terms like broker, financial advisor, and certified financial planner mean nearly the same thing to the untrained consumer; whereas, they carry very different meanings to industry insiders.
What can you do to protect your investments?
Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.
In this 8th episode of the Financial Mentor podcast Jeff Rose, CFP, from GoodFinancialCents.Com gives you an inside look at how the investment sales business (brokers, financial planners, advisors) works. Jeff's had a wide ranging career starting with the wire house model before being recruited at Merrill Lynch and then going onto independent brokerage working as a Registered Investment Advisor and gaining his Certified Financial Planner (CFP) designation.
This depth of experience gives Jeff an unusually well-qualified perspective to help us understand the various investment product business sales models – warts, blemishes and all – so you can improve your investment performance and manage risk more effectively.
In this episode you will discover:
- The exact reason investment publications from brokerage houses are seldom useful.
- The differences between the wire house model, independent brokerage model, and registered investment advisor, and why you should care.
- The amount and type of training a broker receives before recommending investments for your portfolio (you won't believe it!!!).
- The dramatic conflict of interest between a broker salesman's compensation incentives and the investor client's needs.
- Discover the important difference between an advisor, a certified financial planner, and a broker.
- A checklist of the high commission products that serve as a red flag showing your financial advisor may be pursuing his best interests over your own.
- Uncover the various ways a big, fat commission can be hidden from you.
- What an investment salesperson is REALLY telling you when he says, “There are no costs involved.”
- The many ways a “fee only” financial advisor may be compensated (Hint – it's not just his disclosed fee.)
- The level of service you can expect to receive when you have less than $100,000 to invest.
- The true business model lurking behind the investment advice business (Amazingly, it's not investment advice.)
- Why you should care about the difference between “suitability requirement” and “fiduciary responsibility”.
- The reason a referral from your best friend may not be trustworthy.
- The most important question you should ask any financial advisor before working with him.
Resources and Links Mentioned in this Session Include:
- Jeff's website is GoodFinancialCents.com.
- Jeff's new book is Soldier of Finance.
- Here is my 7 Steps To 7 Figures Wealth Building Course
- One of my favorite articles from long, long ago mentioned in the podcast – How Wall Street Legally Deceives You!
- National Association of Personal Financial Advisors (NAPFA.org)
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You can simplify this by saying that anyone who is not just fee based is a salesperson. Period. They get paid only if you buy something. Although some now charge a management fee to put you in mutual funds.
One thing that should be highlighted is that the typical broker, no matter what they call themselves, is a salesperson, and is not an investment expert. Yet, the public goes to them expecting investment expertise. Also, when someone says “this broker is the best in his company”, they are saying he brings in the most commissions. It has nothing to do with how well they do for their clients.
Boomerst3 Thanks for sharing. Yes, in general they are in the sales business and the asset gathering business as discussed in the podcast. With that said, I want to be clear that some financial professionals do pursue their client best interests and do educate themselves on finance and investment strategy to better serve their clients. In other words, I don’t want to paint the entire industry negatively, but I do believe it is accurate to portray the underlying business incentives and model as you do. This helps open consumer’s eyes to the reality underlying the business situation. Then I try to point out that some exceptions do have their clients best interests at heart and do develop the investment and financial expertise to properly serve their clients.
Wade is absolutely amazing – I love when you have him on. I’m bummed I missed your book sale earlier this month, try to catch it on the next go around (if it happens). I’m in my 30’s, but am working to get my mother up to speed on all this. Thanks for your podcast – I’ve been sharing it with friends who “just don’t have the time” but then ask me what they should invest in. Of course they want a 30 second answer and there isn’t one. Thanks Todd!
hfl_property It’s always amazed me that people actually believe there is a 30 second answer to investing done right. I like to tell people, “Investing isn’t like brain surgery… it is far more complicated than that!” Investing is one part finance, one part statistical science, one part business, and 3 parts human emotion all mixed together. Fortunately, there are straightforward answers and I will be teaching them in a course to be launched (hopefully) this winter. Thanks for your support and sharing the podcast with others. BTW, no point in waiting for a book sale because they are only 3-5 dollars each anyway – basically a giveaway as is. Hope that helps.