I have nothing against Financial Advisors as a whole. Most of the time, they fulfill an important void in delivering valuable advice and guidance in an arena where people are very unfamiliar – investments, money management, tax planning, saving for college, and other areas. This is really no different than getting legal advice from an attorney or having a web designer set up your website for you if you’re unfamiliar with the terrain. Where I take issue is when they aren’t transparent. This may be regarding their affiliation with the products they recommend, and overall compensation.
The other night, I was having a conversation with an in-law. Since they know about my blog and that I’ve been involved in investing and finance for years, they sometimes ask me for advice. Since I don’t hold professional certifications and I don’t want to be responsible for losing large sums of someone else’s money should I dispense the wrong advice, I’ll often listen, provide some general opinions, and then recommend how they might go about seeking the best professional advice at a reasonable cost. In this particular case, they’ve been with a “broker” for well over a decade now and based on what they conveyed, it doesn’t sound as though it’s a mutually beneficial relationship. Here are some red flags and gripes I have with the situation:
Is This “Broker” Worth the Money?
- How Much Money??? The first thing I asked is, “Do you even know how much you’re paying him?”, to which the reply was NO. I said, “OK, so, do you know HOW he’s paid? Does he get a percentage of assets under management? Does he get an annual fee? Does he get paid each time he buys or sells assets for you?”. They still had no clue. They said this was never discussed and it wasn’t clear on the statements where the money’s going or how he’s paid.
- How’s the Performance? She really had no idea. He doesn’t do any sort of review or discussion on performance and her general knowledge was that “he didn’t lose all my money, even when the market crashed”. So, if the S&P500 was flat from 2000-2010 and he lost 20%, that would kind of bother me. She just has no idea if this is the case. Add to the situation that she’s been contributing funds along the way and some of the stocks pay a dividend and you can see how difficult it is to track actual investment performance.
- Why is This Guy “Trading Stocks” for a 60-something Year Old Woman??? When I asked what sort of investments were under management, the guy is basically trading in and out of various stocks. He picks up the phone now and then, recommends a trade and then she OKs it. I’m sorry, this just sounds very 1980s and we’ve all seen ample evidence that most professional money managers simply cannot outperform a benchmark index. First off, I’m sure he’s losing to the indices, and next, should a woman close to retirement have her nest egg being tossed around various common stocks as opposed to a mix of bonds and diversified ETFs/Mutual Funds? Throw in taxes and commissions and it becomes even more onerous. Unless this guy is the next Warren Buffet, I’d find it hard to believe that she wouldn’t be better off just holding an ETF like SPY if stock exposure is even appropriate.
I didn’t dig too much deeper, but I was distressed that she may be getting ripped off by a charlatan who’s charging who knows how much money for who knows what performance. She said, “I should just give my money to you to manage”. Being uncomfortable with that, I declined, but I did offer a suggestion. I said, “You should first demand a review of investment performance over the prior 1 year, 5 year and 10 year time periods compared to the S&P500, then make sure you understand how he is compensated and what his total annual compensation has been over the past several years. Finally, he should explain what exactly the investment strategy is for the portfolio and why.” After that, upon being unsatisfied, which I’m sure she would be, she should fire him and move her money to Vanguard or another reputable firm that would provide a low-fee investment option and low-fee or free investment advice.
I don’t mean to paint all Financial Advisors in this light, as I am friends with some both in my personal life and online. The ones I know are knowledgeable, professional and seem like they actually provide their clients with sound advice from what I can tell. I also imagine they are more transparent with their fees and strategies. This guy just sounds shady, like he’s keeping her in the dark and turning over the portfolio, running up her tax bill and running up his salary.
What Would You Advise?
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