The financial services world delivers advice in many different ways to many different people. In this series of blog posts, I’d like to share with you what I believe the 5 key components of financial advice missing from many pre-retirement financial plans.
First off, families choose to work with a financial adviser for many reasons. This person could have knocked on their door, invited them to a dinner seminar, or connected with them through a referral from a friend or family member. They seemed to know what they talked about, and a relationship began. However, some critical elements of the relationship may have never been considered. Today we consider:
#1: A Clear Understanding of What the Advice is Costing You
Many people think they get “free” or “low-cost” advice from their financial adviser or the website(s) they use for advice. Many advisers are charitable and giving people; however, they also work to earn money and expect to be paid for their time and expertise. You may not have thought to ask these questions, but the answers are important to know:
- If you do not pay the adviser for advice, then who pays your adviser?
- Why do they benefit from paying the adviser, and how much do they pay the adviser?
- Does the adviser get paid more to sell certain products, and do you have any concerns that this could influence what you are offered?
- Does the adviser’s firm limit the products and services they can offer you?
If the adviser makes money through commissions on the sale of insurance and investment products, then they may offer complementary advice in the hopes that the advice will result in product sales. In addition, many investments contain other costs that you may not see unless you read all of the disclosures and prospectuses you receive (you do read all of those, right?), which could include:
- “Expense ratios” charged by mutual funds;
- Quarterly “management fees”; and/or
- “Loads” on mutual fund purchases and, in some cases, on the sale of those funds.
This is NOT to say that the presence of commissions indicates a problem! They can be suitable in situations when people cannot afford (or do not need) more comprehensive advice. In addition, do not confuse cost with value. It makes sense to aim for receiving tremendous value at a reasonable, clear fee. If that situation exists, the adviser should be comfortable disclosing their compensation for helping you.
So what should you do now?
- Ask your adviser what they are paid to help you and by whom.
- Do your own research on the underlying fees for the investments you buy.
- Get a second opinion.
- Weigh the costs with the value you are getting and decide if you would like to consider changes to your strategies or your advice provider.
Stay tuned for #2-#5, and thanks for passing this along!