I just attended a wedding where the parents of the bride are divorcing. I sat directly behind them and watched their pain as the priest hammered home the unconditional permanence of their daughter’s commitment.
It reminded me of financial advisors so committed to pushing a certain product that they miss the goal.
The goal of the better priests is to know all types of life scenarios and address them all for their congregation. And the goal of the better FAs is to know all types of life scenarios and invest accordingly for each client’s profile.
But it doesn’t go down this way with a large number of FAs. They’ll shoehorn clients into their preferred (and often most profitable) products.
It’s the same with mortgage advisors, but our post-bubble product set has been reduced to true basics so it’s much harder now for the profit seekers to push the wrong recommendations.
Today I’m highlighting FAs because, in my role as a mortgage advisor, I regularly talk to my clients’ FAs to align all financial goals.
What I find are lots of insurance salesmen in disguise.
Insurance products are so sophisticated that they can be (and are) sold as investments. It’s very profitable and since the FA asks all the right initial consultation questions—when do you want to retire?, when will the kids be in college?, etc.—the client thinks they’re getting great advice. But their money is actually going into high-fee insurance.
A few years back, I approached one of my trusted FAs about this phenomenon and he summed it up as only a true FA can: insure for what you need and invest the rest.
If you’re serious about a financial plan, you need to identify this kind of FA. That’s easier said than done because FAs can have a few different pay models:
(1) Fee-Only means the FA is collecting a percent of assets they’re managing for you and/or will charge hourly fees for actual planning services—modeling out cash needed for college, retirement, etc. Fee-only aligns your interests with theirs because it doesn’t incentivize them to push certain products or churn trades.
(2) Commission Based means the FA is paid on a transactional basis. This can be useful if you’re looking to trade. But if you’re trying to keep to a simple long-term plan, you can risk higher fees and unreliable performance because the FA is incentivized to generate commissions by offering different trades and strategies.
(3) Insurance Company Advisors are FAs who’re mostly incentivized to sell insurance, which as noted above, are sold as investment strategies. They can also be licensed to sell mutual funds. In most cases, all sales are commission-based. Insurance is an important part of a financial plan, but remember: it’s best to insure for what you need and invest the rest.
Knowing about these models can help you identify the right advisor for you, but just know that many FAs do a mix. For example, many Fee-Only FAs will also be able to take care of your insurance needs.
If you’ve never had an FA, the best approach is to find a Fee-Only FA who’s willing to do a one-time charge to develop a plan for you. Then you can size them up before handing over your assets.
The best way to find a good FA is by referrals from your other advisors—realtors, mortgage advisors, tax preparers, estate lawyers, etc. Even if you’ve just gotten started with one of these people, asking their recommendations is a good test to see if they’re a true advisor with an established network of resources, or just pushing their chosen product.
As I was reminded watching that wedding, it’s easy for people who do the same thing everyday to fall into this cookie-cutter mode: offer what they offer with limited context or perspective on who they’re talking to.
The good news is that the newlyweds were already blissfully in for the long haul so the priest’s words resonated. And at least the divorcing couple have followed a disciplined financial plan for three decades so they’ll be ok even as they embark on their own paths.
Here’s more on why it’s hard to find a good financial advisor: