It’s every investor’s nightmare — squirrelling away as much money as possible only to later discover part of it was squandered in fees, commissions and unsuitable investments a financial advisor made.
That happens all too often, even in the post-Bernie Madoff era.
[See: 10 Questions to Ask Before You Hire a Financial Advisor.]
Andy Raub, founder and president of Raub Capital Management, a financial advisory practice of Ameriprise Financial Services in Dallas, says he recently helped a client’s son who heavily invested in fixed annuities via a trust because a “friend” sold him the idea. “It turned into a tax nightmare for them,” says Raub, an advisor who is registered as a broker and an investment advisor representative. “It’s costing him more in taxes and penalties than what he earned.”
With all the legalese and hidden clauses in financial paperwork, you can’t always tell who really has your best interests at heart when you first meet or begin working with an advisor.
“The paperwork is confusing on purpose because they don’t want consumers to know what they are paying,” says Larry Miles, a principal of AdvicePeriod in Los Angeles. “It’s one of the dirty secrets of the industry.”
Here are some signs that your advisor may be a poor choice:
They are a part-time fiduciary. Before signing any paperwork, you need to know how an advisor gets paid. Some advisors are hybrids, serving as fee-earning fiduciaries part of the time and broker-dealers making commissions the rest of the time.
If the “advisor” is dually registered as both a broker and a fiduciary, turn and run, Miles says.
Brokers earn commissions paid by vendors, such as a mutual fund, insurance or real estate company, for selling their product to an investor. So instead of a low-cost fund, brokers can sell one that is more expensive but still “suitable” for the investor.
“The title ‘dually registered’ further confuses investors, because you can wear both hats,” Miles says. “So it’s always which hat are you wearing, right now?”
Most financial professionals usually fall into one of two camps, product- or planning-focused, Raub says. “A planning-focused advisor should have the client’s best interests in mind and be willing to build a big picture plan independent of the products used,” Raub says. “Product-focused generally means selling a product for a commission.”
Although they seem similar, fee-based advisors may charge fees and commissions for products they sell, whereas fee-only advisors only receive compensation for their advice and don’t accept any fees or commissions from product sales.
For an advisor who is required to represent only your interests, go with a registered investment advisor. RIAs must always place their clients’ interests ahead of their own and disclose any potential conflicts.
They get money from multiple sources. You can find out about all sources of compensation by asking for a copy of Form ADV, which all financial advisors who recommend investments must fill out to register their license with the SEC or the state where they do business. This form includes the advisor’s fee schedule and any other compensation, such as a kickback for referring a client to an attorney, Miles says.
By reviewing this form, you’ll know if the person receives commissions or not. To find out more about an advisor’s company, Miles suggests googling Form ADV Part 2 with the term “investment adviser registration” and the company’s name. The form will disclose all of the company’s business activities. Review any checked boxes on the form.
“If they are also an insurance broker or a broker-dealer, it’s a yellow flag that you want to look into, because it creates a conflict of interest,” he says.
[See: 10 Long-Term Investing Strategies That Work.]
They charge excessive fees. What a financial professional charges can vary according to the type of advice, whether for retirement investing or some other future goal, and how often advice is sought. Unfortunately, there isn’t an industry standard, so every advisor is different, Miles says. He suggests investors pay an hourly or fixed fee for advice about asset allocation and investment selection, but more for estate or financial planning.
You should be paying no more than a quarter of a percent to an advisor for your asset allocation and investment selection, Miles says. “Otherwise, you are paying too much no matter if you have $10,000 or $10 million.”
Raub, who typically takes only clients with at least $1 million in assets, says he charges a 1 percent annual asset management fee that is paid in either monthly or quarterly installments. Clients are also charged a fee to build a financial plan that typically starts at $500 and can cost as much as several thousand dollars depending on the complexity, he says.
Either way, get an invoice to see how much you are paying, says Carrie Catlin, principal at Fenway Financial Advisors in Boston.
They claim exclusivity. Beware of any advisor who claims to have a lock on certain investments, Miles says. “If your advisor promises to get you into investments that only he or she (or their firm) can access, that’s another lie.”
Kristin Hull, CEO and founder of Nia Impact Advisors in Oakland, California, says it’s also a red flag if an advisor seems “to know everything” rather than referring to colleagues who might specialize in one asset class or another.
They don’t have a customized plan. An advisor who only offers a one-size-fits-all plan or product is also a base of concern. Typically, that product or plan is sold by someone who makes a commission on the sale and has to hit a new quota each month, says Raub, author of “The Encore Curve: Retire With a Life Plan That Excites You .”
“If any financial advisor’s answer to a question is always ‘buy this,’ then you’d better run as fast as you can, because more than likely they don’t have your best interest in mind,” he says.
One way to get a sense of what you might be getting: Ask the advisor to show you a sample portfolio before you begin, Hull says.
And make sure you share similar goals. Ask, “How will you measure my success if I choose to work with you,” Catlin says.
[See: 8 Things Not to Hide From Your Investment Professional.]
They don’t have references. Advisor shopping is like finding a doctor who will do surgery on you, Raub says. Talk to two or three other clients who have gone under the knife, metaphorically speaking, because you don’t want to be an advisor’s guinea pig any more than you’d want to be a surgeon’s.
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6 Signs Your Financial Advisor Is Terrible originally appeared on usnews.com
