1. Value your advisor’s independence
There are more financial advisor factories than you could want to remember, but you are probably familiar with more than one: Morgan Stanley, Merrill Lynch, UBS, Wells Fargo, Northwestern Mutual, Ameriprise, Edward Jones, Raymond James, and LPL Financial—to just name a few.
Why so many? Companies all make a lot of money with little risk. Every year they hire swarms of degree-holding job seekers hoping 1 out of 10 bring in any sort paying customer. Across the industry, the first-year advisor failure rate falls between 70-90%.
The industry knows this is an issue but can’t stop themselves. There are still trillions of household dollars that a recruit hasn’t cold called yet.
The advisors that make it through this grueling process don’t succeed because they provided better returns or better service. The ones that succeed sell and sell hard.
The industry is designed to give you with two options: a desperate initiate or an experienced salesperson.
2. Know how your advisor gets paid.
You have to ask. Know how your advisor gets paid: the person and the company. Most all financial advisors make a living from commission. They are paid a portion of the fees you pay and the other half goes to their company. Commonly, if you are charged $1,000 by your advisor, the smiling, well-dressed person in front of you gets paid $400. The remaining $600 goes up the pyramid. Rinse and repeat.
The presence of commission-based compensation can drive any financial advisory relationship haywire. Many “advisors” only get paid when they sell you a product—often on the front-end. Many financial products like annuities, mutual funds, REITs, and other products are often discussed at length with little emphasis on where exactly all this money goes.
Rule of thumb: The more parties involved in getting your money invested the higher and more complicated your fees will be.
3. Don't pay too much
With adoption of ETFs and index funds, investing fees have never been lower or more efficient than today. Your financial advisor should be able to take advantage of newer technologies and be able to pass the savings immediately on to clients—not investing like they have the last 20 years or siphon the savings to hidden parties (i.e. management/shareholders) not involved in you and your advisor’s relationship.
Fees should be kept to a minimum. Many advisors are still charging 1% on the total money they invest for you (say $1,000 per year on a $100,000 investment). On top of that, advisors can place you in funds that charge north of 1% on top of their own fees for a total charge of 2% of your money per year.
Not only are everyone’s returns expected to be lower over the long-term (long-term interest rates are all at or near all-time lows), there are now lower cost and better diversified options that are expected to beat their higher-cost peer funds.
You’re combined investment expenses should not exceed 1% in this investment environment.
4. Shop around
There are thousands of financial advisors in each market yet many investors settle for the first advisor they get around to talking to. No matter how much you are expecting to pay or invest, picking your financial advisor is a $100,000-plus decision over time. Many financial advisors know this and price their services at large mark-ups.
You wouldn’t buy a car without knowing what your desired model costs. Car prices can vary thousands of dollars in the same city at different dealerships. Prices in the market for financial advice will vary more than the sedan being offered by the car salesman.
5. Ask Questions
Know your questions ahead of time and keep it simple. Forget to ask something? You can always follow-up a second time. Someone will be there when you call back.