Unfortunately, in the world of financial advisors, titles do not always mean what they appear to mean. It is rare to find a financial consultant who will act in the best interests of the consumer, and it is truly a “buyer beware” situation. Unless you are well-versed in various business approaches, it may be difficult to identify between consultants.
As a result, we dispatched a covert spy from EAA to an event hosted by the business that offered this advice. Partly for amusement, and partly to watch how this sales pitch was presented to the public. Was their information correct in any way? Most importantly, what were the red flags that the ordinary financial consumer would miss? Here are the most important ones;
1. Commission-Based
As investors see the detrimental impact that large sales charges and transaction expenses may have, the commission-based, product-centric business model is dying. Furthermore, a commission-based structure adds a conflict of interest—an adviser may choose assets based on which ones pay large fees rather than which ones are in the best interests of the customer. A fee-only approach is significantly better aligned with the interests of clients since the adviser has no motive to promote one brand of products over another—the only motive is to do what is best for the customer.
2. Fee-based is the Red Flag for a Financial Advisor.
The terminology used to identify distinct adviser business models is perplexing. The term “fee-only” refers to the fact that the client is only paid a price for guidance. Fee-based indicates that the customer is paid a fee for advice as well as commissions on the purchase and sale of securities or other items. Fee-based advisors who are “dual-registered” to offer securities and insurance.
Relationship with a broker, bank, or insurance.
Advisors affiliated with these organizations are frequently urged to advocate the broker, bank, or insurer’s products above others, even if they do not precisely match the client’s condition. In certain situations, they may not have access to a wide range of assets and may be restricted to a shortlist of allowed assets. An independent financial adviser has access to funds from any fund source and can advise you on the optimum portfolio for your circumstances.
3. Stupid Awards.
There are several pay-to-play reward programs available. In reality, EAA frequently receives emails with the subject line “Congratulations, you have been recognized as a top adviser in Obscure Magazine No One Has Ever Heard Of!” Purchase our $149.99 commemorative plaque to claim your award!” Thank you very much. Examine the honors and distinctions listed on an advisor’s website to understand how winners are picked. Awards selected by a peer vote or by objective quality criteria will always be more meaningful than those that may be purchased.
4. Insurance is Marketed as an Investment.
Do you believe auto insurance to be an investment? It’s something you pay for every year with the intention that you never use it. The same should be said about life insurance. Its purpose is to defend, not to develop. When compared to low-cost index funds, it is an extremely inefficient approach to produce growth.
So, why did the presenter stress how frightening the markets are? He gets paid commissions for marketing annuities, which are insurance company contracts. Annuities give a future source of income in return for a certain number of years of premium payments.
5. There is No Indication Of a Financial Standard.
A financial advisor should be able to explain in writing how they always behave in their customers’ best interests. (For example, a cost-effective and tax-efficient plan, access to institutional assets, collaboration with all specialists in a client’s life to guarantee a coordinated approach, and payment made directly by the client.) Vague platitudes about caring for clients are insufficient.
Conclusion
We have made a commitment to total openness as fiduciaries. That means we’re glad to discuss the specifics of how we manage our company, how we get paid, and how we secure our clients’ personal information. It’s not thrilling, but it’s necessary!
The Executive Assists Advisors is a three-part form that all financial advisors are required to file to the Securities and Exchange Commission every year. Our EAA is always accessible online, and new customers are provided with a copy as part of the onboarding process. Existing customers are sent a summary of any changes to the EAA once a year or whenever it is amended. Form CRS is also sent when a current customer registers a new kind of account or when we propose a rollover from a retirement account.
