Being an investor today has never been more challenging. There are many reasons for this and some are obvious but, unfortunately, some are not obvious at all. Most investors don't realize that most of the information they rely upon is not objective, or even in their own best interests. Many people may find this hard to believe so I want to examine where most investors get their information and identify why it may not be suitable for one's specific situation. Before I start, let me refresh our memories with an age old adage, "there is no free lunch". Having spent my entire career in retirement planning and investments I can attest, first hand, to an industry that goes to great lengths to make investors THINK their advice is free AND objective. Don't be fooled.
I’m going to provide you with a few examples from some of the more common sources of investment information and describe to you why you should be bit skeptical about what you are hearing. Let me include another old adage - "if you want to really understand what is going on, follow the money. Specifically, you need to ask how and from whom the financial experts delivering their advice get paid.
Let me start with the more popular and available sources of financial information - TV and magazines, including digital editions. We all know that major financial news media sources rely on advertising to keep them in business. So, examine who the advertisers are. What do you find? I find the majority are firms provide trading platforms, trading analysis programs and alerts, "market insights" so one can decide when they want to trade (or "should"), questionnaires and worksheets to best determine your trading style and how to use options and leverage (debt) in your trading strategies. It's pretty clear that these advertisers want to arm you to be the most active trader you can be. Trading is where their profits come from. Independent studies show more trading has an inverse relationship to investment growth (even when it is "free"). If the TV show or article does not drive viewers or readers to their products they are going to take those advertising dollars elsewhere. Additionally, because of the requirement to appeal to a mass market, this advice is not tailored to an individual's needs nor is it independent.
Let me now move to another common source of "free" investment advice: insurance companies, banks and mutual fund companies or any firm with a financial product or service to sell. Many of these firms have financial "experts" on staff.
Keep in mind that their "experts" are experts on selling their company's products and are often only compensated when whey sell these products. They are not experts in competing products and rarely experts on varied strategies to achieve maximum benefits. Put yourself in these "experts" shoes, if they don't make money for their employer by selling that company's products, they will likely be terminated. So when such an expert puts together your "financial plan" do you think they are evaluating the full spectrum of possibilities to optimally meet your individual needs? Or, is their plan steering you towards the product or strategy that they have to sell? Many of you are now seeing a basic premise of successful investing - selecting a source of financial expertise that is not tied in to their employer's products - we call this being independent.
Now let me go to another common source of financial information - financial advisers. These come in many forms and those difference forms matter significantly as to their degree of independence. Our quest to "follow the money" will also get a bit more difficult because many of these advisors are not clear about where their loyalties lie. There are basically three types of financial advisers and they can generally be separated based on how they charge for their services. They are - 1) Fee Only, 2) Commission Only and 3) Fee and Commission based. This last category also goes by the euphemism of "Fee Based". Let's go through those three types:
- Fee Only - This is generally the best form of compensation to indicate an advisor's independence. If you are paying someone directly for advice, without buying any product or service, there is a higher probability that they are only working for you. However, this is not foolproof. Fee Only is generally a strong clue that the adviser is going to provide independent and objective advice without interference created by rewards to steer clients to higher cost products, but you should still make sure you verify who they work for first. We are seeing more and more "fee only" advisers that are locked into to one firm's products in return for free advertising, free training and product support, free or below market office space, etc. While offering multiple company's products is not always a sign of independence but an advisor offering only one company's products generally means the advisor is not independent. It usually means the advisor has a contractual obligation to their employer first, not you. Fee only advisors generally work for a company known as a "registered investment advisor", often abbreviated as RIA. Additionally, fee-only advisors are generally the only advisors that are fiduciaries (meaning they are required to put the client's well-being ahead of their own AND their employer).
- Commission - This methodology is often considered the most conflicted source of advice for investors: because advice is clearly linked to the sale of a product. Never underestimate how one can rationalize what they have to sell is in the best interests of the buyer when it is how the seller gets paid. I find this approach is often associated with a seller that doesn’t actually know what the clients alternative solutions are. However, with this approach you always know what you are getting, i.e. someone with a strong incentive to sell you something, whether you need it or not. You can always shop around at different company sales representatives and compare multiple company's products. Unfortunately, because most financial products are so complex this can be difficult, even for those with extensive knowledge of those products, but it is at least possible.
- Fee Based - There is no official definition of this term but presumably the users of this term generate most of their income by fee only. However, such advisors keep the ability to sell products and be paid a commission on those product sales. First, it is not a coincidence that this term is so closely aligned to "Fee Only" (oh those clever advertisers). The "slight-of-hand" comes in when they switch between Fee-Only and Commission. I have yet to see this type of advisor clearly inform the client when they switch from one fee methodology to the other. I’m also not aware of any regulation that requires such notification. I consider this type of adviser the one that has to be watched most closely. You have no idea where their advice is actually coming from - in your best interest or trying to sell a product so they can also get a commission. Fee based advisors can work for almost any type of company, except, generally, a registered investment advisory firm (RIA).
It is probably obvious by now that determining the cost of advice and the independence of the advisor can be difficult. But the reward can be substantial. Additionally, if a fee only - fiduciary advisor is important to you such advisors are the only advisers that will gladly write that down on company letterhead, with no if, ands or buts. You can always simply ask for that. If there is any hesitation or a "story" you need to hear, then they are likely not a fee-only - fiduciary advisor.
No one likes to pay for something that does not provide them with the best benefit for the cost. Unfortunately, with complex financial products that can be more difficult than it should be. Knowing someone is required to work for you first can only be found with a fee only, fiduciary advisor. Any other form of payment creates a conflict between the provider of that advice and the person they are giving advice to, no matter how hard they try to not let it. When it comes to financial products and advice, never has it been more true - there is no free lunch.
About the Author: Milt Fullen is a CPA and CFP® fee-only fiduciary advisor with more than 30 years of experience in the financial services industry. He is a multi-year winner of Columbus Monthly’s Five Star Wealth Manager Award, and Fullen Financial Group ranks among Columbus Business First’s top fee-only financial planning firms in Central Ohio. We have helped over 200 individuals and families prepare for retirement, and we manage more than $180 million of assets on behalf of our clients. Our team of professional advisors has a wealth of experience and the best credentials in the industry, supported by the latest technology tools and a dedicated client service team.