Financial advisors and insurance agents may have a certain reputation in many circles. While I believe the majority are honest, some advisors may give the rest a bad name by focusing on the commission instead of the client. And, even if you meet an honest advisor, how can you know they will do the job suited for you?
What makes a “good” advisor?
A good place to start is to identify what makes a good advisor:
·Professional Competence
A competent advisor will keep up with the industry. They will be aware of product changes, new products, tax code changes, new laws, and new tools of the trade. Advisors who don’t keep up will ultimately become less competent as time goes on.
·Ability to Make Recommendations
Advisors will frequently provide too many options and expect the client to choose; this could be because they’re afraid to take responsibility and make the wrong recommendation. A good advisor should be able to make specific recommendations and help their clients stay the course of action after they have made their choice.
·Knowing When They Are in Over Their Head
A good advisor will never wing it when they aren't sure how to solve your problem just to get the sale. They will have a team of other professionals or a support network to lean on, so they can give the best advice.
·Providing Advice That Is in the Interest of the Client (Not Themselves)
This is probably the most important trait of all. Not all advisors are obligated to do what is in the client’s interest. For example, an advisor who is not a fiduciary is not legally obligated to act in the client’s best interest.
Being a good advisor should be simple: Understand the client’s situation, know the products you are offering, and give advice you believe is in the client’s interest.
Problems in the industry
After over 35 years in the financial and tax business, I’ve witnessed many instances of an advisor not acting in a client’s interest. According to theWhite House’s Council of Economic Advisers in 2015, it’s estimated that Americans lose around $17 billion a year in foregone retirement earnings due to conflicted advice advisors may have given.1 While the report discusses the costs of conflicted advice, it is important to keep in mind that many financial advisors hold themselves to high professional standards.
Many of the problems in the financial industry stem from the very nature of the industry. Brokers are compensated by commissions (a percentage of the sale made), which causes a conflict of interest. Why put the client’s money in one product when other products pay the broker more?
Other times, the advisor is a captive agent, meaning they can only sell the products of a certain company, or they will only get rewards if they sell particular products. If an advisor has to hit a sales goal with a certain product to win a luxury trip, what’s stopping them from pushing that product to everyone, even to clients it may not benefit?
Financial advisors, insurance agents, and stock brokers usually only must meet the criteria of suitability. (Is it suitable for the client?) But, a product may be suitable without being the appropriate option for the client. Other times, a broker isn’t intentionally misleading a client but is, instead, not completely up to date or informed. It takes time and effort to constantly research new products; it’s much easier to sell everyone the same thing.
What’s the solution?
After considering all this, you may feel discouraged. How can we solve these industry problems? Or, if you’re an advisor, how can you ensure your customers know they can trust you?
One popular method advisors go for is the fee-only method. These advisors won’t handle products that pay them a commission but instead derive their compensation from overarching fees charged for their advice. This looks like a good arrangement on the surface, as it takes the issue of commission away. But, a fee-only advisor is probably not going to recommend any commission-based product that could be an appropriate fit for a client, instead deferring to fee-based accounts.
A better method is for registered investment advisors (RIAs), who have a Series 65, 63, or 66 license, to register with the Securities and Exchange Commission (SEC) and/or the state in which they’re located. These advisors are then able to forgo commissions and, instead, charge clients a management percentage fee, typically 1-2% of the assets they manage. RIAs can create portfolios from a mix of stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This method is usually appropriately aligned with the interests of the client, since the advisor can only make more money by increasing the value of the client’s portfolio.
Wise counsel in a confusing world
The financial world is a wild jungle of diverse rules, products, and opinions on how to best manage money. If you have any amount of wealth, you owe it to yourself to seek out an advisor who understands your goals and objectives. Your first step is to seek referrals from trusted friends and family, asking them lots of questions. The advisor you choose should know more than one area of the financial universe or have a team who can assist in the areas they don’t know.
My advice: Never invest in something until you understand what you are investing in, and always get explanations for why an advisor is making certain recommendations. Most of all, don’t be afraid to seek a second opinion!
This content was brought to you by Impact PartnersVoice. Securities and advisory services offered through Centaurus Financial, Inc., member FINRA/ SIPC, a Registered Investment Advisor. JAG Financial Services and Centaurus Financial, Inc. are not affiliated. Supervisory Branch: 2300 E. Katella Avenue, Suite 200, Anaheim, CA 92806 (800) 880-4234. DT006078-1219
