The Informed Investor
As a consumer, we often gravitate to brand names. Usually, we assume that brand name products or services are a safer buy and offer higher quality and consistency.
While this might make good sense when buying a car or refrigerator—is it smart to apply that same thinking when choosing a financial advisor?
Great question! After all, we’ve all seen the ads and commercials that imply that many of these household names provide old-fashioned, trustworthy service.
Surprisingly, the business models of these big Wall Street firms often tell a completely different story. Here’s why:
- Their first loyalty might not be to you
If you hire an advisor, you’d want them to give you actual advice, right? So they recommend what’s best for you. Consumers might assume that always happens, but unfortunately it may not be a valid assumption. Why? Because not all people who use the title of “Financial Advisor” have a legal obligation to put your interests first.
Their choice of business model usually means they are not required to act as your fiduciary. For these firms, it is perfectly legal for them to recommend a more expensive product to you, as long as it is generally “suitable” for your needs. Of course, that doesn’t mean there are not great advisors who work for them that do put your interests first. However, you can’t let your guard down and depend on them to do so all the time.
- Product sales are their priority
Some of the big brands are product companies first. Whether its mutual funds, insurance or another product, a sizable portion of the company’s profits are usually made off financial products. So instead of recommending a low-cost option that would do the same thing and save you money, they might recommend a more expensive proprietary product.
Thus, you may be getting product recommendations instead of true financial advice.
- Their Financial Advisors usually are paid on commission
Because of their product focus, these firms could possibly operate like other product companies: by paying a commission to the advisor who sells the product. This business model makes their job description closer to a salesperson than a financial advisor. Jim Cahn recently wrote an article for Forbes titled, “Things Your Wealth Manager Doesn’t Want You to Know.” Cahn points out that advisors at brand-name wealth management firms are primarily required to bring in new assets and new accounts. And come performance review time, they are judged based on the amount of assets they brought in, not on the results they obtained for their clients(1).
- They may use Sales Contests and Quotas to push products
It can be common for these firms to organize sales contests that reward the advisor who sells the most investment products to their clients.(2) So that sudden recommendation to buy a particular fund or insurance product may have been motivated by their need, not yours. This could present a conflict of interest.
Even if you’re lucky enough to get advisors that strive to remain loyal to you, they still might need to meet set quotas to keep their jobs. Since performance is judged on sales, they may have no choice but to conform to the firm’s operational demands.
Thankfully, you have another choice: independent financial advisors.
On Your Side
Unlike the big brand name firms, independent financial advisors have a much more consumer-friendly business model.
First, if they are a Registered Investment Advisory firm, they act as your fiduciary. That means they are legally obligated to put your interests first. If they don’t, you have legal recourse.
Second, if you choose a fee-only independent advisor, they don’t receive commissions. So with sales out of the equation, you simply get advice that’s in your best interest. You pay them the same way you’d pay your accountant or attorney.
Third, those big brand-name firms have marketing budgets that are so big that they don’t necessarily need to keep clients happy. If someone leaves, there’s probably another prospect on their way in. Compare this to independent advisors which are usually local businesses. They need good word-of-mouth-advertising to attract clients, so their goal is to keep clients satisfied and informed.
What about Expertise?
You may wonder, though, don’t the big firms have far more expertise?
Again, you may be surprised. Of course they have some great advisors, but a big part of the culture is sales. Often sales training is emphasized and advisors could be encouraged to sell more. That’s more focus on sales, and less focus on helping you solve your financial challenges.
So, of course, do your due diligence. Look for a firm with professionals that have solid credentials. Work with firms that have enough experience that they’ve helped clients successfully navigate different types of markets.
Take Home Message
In conclusion, it’s critical to enter the financial services world with your eyes wide open. By learning the facts about the industry and choosing carefully, you can find a financial advisor that can help you achieve your goals and avoid financial mistakes. But as you can see, there are obstacles out there, so choose carefully.
1. Cahn, J. (2020). Three Things Your Wealth Manager Doesn’t Want You To Know. Retrieved 6 January 2020, from https://www.forbes.com/sites/jamescahn/2013/11/21/three-things-your-wealth-manager-doesnt-want-you-to-know/
2. Brown, J. (2020). Sales Contests. Retrieved 6 January 2020, from https://thereformedbroker.com/2016/03/28/sales-contests/
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