Our CEO, Liz Davidson, recently wrote a book called What Your Financial Advisor Isn’t Telling You that details many of the essential financial truths that financial advisors generally neglect to tell their clients. The main reason is that advisors are generally compensated by either selling financial products or by managing assets. Sometimes this can present a conflict of interest for an advisor when a client is better off doing something other than investing through the advisor. Other times, advisors are simply unaware of options that don’t involve their products or services. After all, advisors need to focus their time on selling and gathering assets in order to make money.
This reminds me of my own previous life as a financial advisor. My first job was for an investment brokerage that was sued for providing incentives to brokers to sell mutual funds from seven “preferred” fund companies that were kicking back fees to the brokerage firm. I then went to an independent brokerage firm, then to a fee-based role, and finally a fee-only investment advisory firm.
At each step in my career, I gravitated further and further from conflicts of interest. However, in each position, I continued to find that clients were not getting the full picture. This led me to leave the financial advisory profession altogether and become a full-time financial wellness educator at Financial Finesse. In retrospect, here are five of the main things my former clients didn’t know but should have:
1) My main qualification for my first investment job out of college was selling knives. I was an economics major but never took a single class in anything involving practical finance. Instead, I was hired because of my success in a summer job selling knives in people’s homes. This was pretty typical of the other new brokers I met, many of whom came from sales backgrounds completely unrelated to finance.
You might think that perhaps the brokerage firm taught us what we needed to know about financial planning, but the training was centered around sales tactics with just enough insurance and investment knowledge to avoid breaking the law. There was very little information about tax strategies, employee benefits, or other financial topics unrelated to selling the firm’s products. I had to learn all of that on my own.
If you’re going to hire a financial planner, it helps to look for one who at least has the Certified Financial Planner™ designation. CFP® certificants must earn a bachelor’s degree, complete college-level courses in financial planning, pass a rigorous exam, have 3 years or more of professional experience, and fulfill ongoing ethics and continuing education requirements. Financial Finesse actually requires it for all our planner applicants.
2) I was only paid to sell certain products or gather assets. If I didn’t recommend that clients invest in our products or use our services, I didn’t eat. However, that didn’t stop me from advising clients to build up an emergency fund, pay off high-interest debt, and max out their employer’s retirement accounts before investing with me. (I can’t say that was true for all advisors though.)
The one exception was IRA rollovers, which are the bread-and-butter for many advisors. This is despite the fact that there are many reasons why you might be better off rolling your previous employer’s retirement plan into your current one or even leaving it where it is rather than rolling it into an IRA. Similarly, I neglected to tell clients about other alternatives to my firm’s products like direct-sold insurance policies, no-load mutual funds, US government savings bonds, prepaid college plans, and investing directly in a real estate property or business. I also rarely if ever discussed strategies to improve and protect my clients’ credit scores, deal with student loans, mortgages and other debts, buy a home, get their estate planning documents in order, or address a host of other important financial decisions that didn’t involve selling investment or insurance products.
To avoid these problems, see if your employer offers an unbiased financial wellness program or look for advisors who charge fixed fees that are independent of what you decide to do with your money. These advisors aren’t limited to recommending the products or services of a particular firm and are more likely to provide more comprehensive advice. You can find advisors who charge annual, monthly, and hourly fees at the Alliance of Comprehensive Planners, the XY Planning Network, and the Garrett Planning Network, respectively.
3) I couldn’t reliably beat the market. That may be a surprising admission since advisors and brokers typically claim they can pick investments that can outperform the market. Sure there are times when the investments outperform, but in the long run, these active strategies overwhelmingly tend to actually underperform the market due to their fees and trading costs.
Advisors generally use this underperformance as an opportunity to demonstrate their value by reviewing their clients’ portfolios and replacing the underperforming funds with other funds that performed better. This helps justify their fees by showing that they’re “doing something.” (Nevermind that funds that outperform are unlikely to continue outperforming.)
Rather than trying to chase past performance, most investment experts say you’re much likely better off simply sticking to a diversified portfolio of low cost funds. Your employer’s retirement plan may offer a program like Financial Engines or Guided Choice that can help you put one together. You can also get a customized portfolio of low cost index funds outside your employer’s plan for free from certain “robo-advisors” like Wisebanyan, Future Advisor (there’s no charge for recommendations but you have to pay an asset management fee if you want them to make the trades for you) and Charles Schwab’s Intelligent Portfolios (the money has to be at Schwab and they use a lot of their own index funds). If you prefer to work with a human advisor, ask them what they charge and if they recommend index funds or more expensive actively managed funds.
4) I didn’t help the people who needed it the most. We were so busy pitching high-priced investments to people who could afford them that there was little time to help those who couldn’t. That left the majority of people who needed help saving money and accumulating something to invest with nowhere to go. As they say, it ain’t social work
If you’re struggling with budgeting or debt, there are some options. Your employer might have an EAP or financial wellness provider that can provide some guidance and resources to help you pay it off faster. If you’re having trouble making even the minimum payments on your debt, you may want to work with a nonprofit credit counseling agency.
5) I may even have enabled clients to hurt themselves. This isn’t to say that brokers and advisors don’t have any value. Some of the most valuable things I did were to encourage people to invest in the first place, prevent them from hurting themselves by taking too much risk (investing everything in dot com stocks at the height of the technology bubble) or not enough (leaving everything in a savings or money market account), and help them stick with their investment plan through thick and thin rather than making the common mistake of becoming more aggressive when the stock market was doing well and then bailing out of stocks during the eventual downturn.
That being said, there were too many times when I gave in to a client’s request out of fear of losing their business altogether. Some advisors even take advantage of people’s emotions by selling aggressive investments in good times and conservative ones when things are rough. A good advisor should be able to say “no” and act as a check on your emotions, not an enabler of them.
My point isn’t that I was a particularly bad advisor. I tried to do the best I could for my clients within an imperfect system. That system is beginning to change for the better, but in the meantime, it’s important for you to know what your advisor isn’t telling you.
