Why You Need To Hire A Financial Advisor That Doesn't Care
Hi, I’m Simon. I’m a financial advisor and I don’t care.
Hi, I’m a CERTIFIED FINANCIAL PLANNER™ and when it comes to my clients, I don’t care. But don’t worry, there are plenty of other people out there who do care.
Take, for example, that insurance agent who is trying to sell you a permanent life insurance policy with a $30,000 a year premium. He cares a lot whether you buy it since if you do, he can expect to personally pocket a commission of close to $20,000 right away and then around $1,400 a year for as long as you live (as long as you don’t cancel the policy).
Excuse the pun, but you can bet your life that he really, really cares. If you are 30-year old and you live to your actuarial life expectancy (and so does the insurance agent), he stands to personally make not far off $100,000 from you if you say yes to his sales pitch for that permanent policy with a $30,000 a year premium.
Chances are he’s probably not making as much noise instead of about a 20-year level term policy for $1 million, which — if you are a 30-year-old healthy female, who lives in New York — might yield him $500 in year one. If he’s lucky.
Or perhaps this same insurance agent is telling you about the “wonders” of a fixed index annuity. He really cares if you buy this as well, since for every $250,000 you agree to put into this product, he can expect a check for around $17,000 to hit his personal bank account pretty much right away. He also may be one step closer to that all-expenses paid trip to a ridiculous resort in the Caribbean for him and the missus that the insurance companies are famous for dangling in front of their top producing sales people. Er, my guess is that he really cares if you choose that particular annuity over a different strategy. A lot.
Commission-Based “Financial Advisors”
The commission-based financial advisors who work for banks, brokers, credit unions etc. really care about you too. They are paid transactionally through having a Series 7 license, which only gives them the right to be paid commissions and explicitly does not give them the right to provide financial advice for compensation to you or anyone else. They require a Series 65 license or CFP® designation to do that. The more money they can talk you into putting into those specific often underperforming, expensive actively-managed mutual funds that their firm instructs them to sell (the ones with annual expense ratios of often 1.6%, 1.8%, 2.0%, 2.2% and higher), the louder that “ka-ching!” sound gets in their head. What your needs are or what would be in your best interests is not exactly top of mind for them, their approach is transactional and benefits them personally.
They are most likely noticeably silent about recommending the option of you buying that exchange-traded fund that offers exposure to thousands of companies that costs 0.03% per year (for which they receive nothing in commissions), but which, based on analysis of a mountain of data, will likely outperform their suggestions over the long term and may well represent exactly what you should be investing in.
Your commission-based “financial advisor” also cares very much if you buy that non-traded REIT he may be pitching you. Firms can take anything from 10% to even as high as 20% in commissions for selling you these things (as well as up to another 4% or 5% each year and maybe even take another cut when you sell) and your smiling commission-based financial advisor that smooth-talks you into the purchase is going to get his piece of that.
Real Estate and Mortgage Brokers
Real estate brokers and mortgage bankers really care that you buy that house. Can you expect any objectivity from them? They can be great at what they do and often genuinely work on your behalf once they become convinced that you “can” buy the property. But are they the people to be involved in answering the question of whether you actually “should” buy it from a financial planning perspective?
So what you need is someone who, from a compensation standpoint, doesn’t care at all whether or not you buy that house, take out that permanent insurance policy or sock your money into that expensive annuity, mutual fund or non-traded REIT. Someone who can give it to you straight and lay out the logic and reasoning, without having any vested interest in the outcome of the transaction, no dog in the fight, no skin in the game — whatever metaphor you want to use.
What this person cares about is what your best interests are. Not the interests of the insurance company, the bank, the credit union, mutual fund provider or the real estate agency or their sales reps. And certainly not their own best interests when it comes to making commissions out of you — because there are no commissions.
That person works for a Registered Investment Advisor, can prove that he is a fiduciary to you at all times by providing you with a copy of the firm’s Form ADV, preferably has the CFP® designation and a flat fee-only pricing structure with an available hourly option and a clean regulatory record.
If your financial professional can’t check those boxes, then they care too much (about how to monetize you through commissions) and you should avoid them.
I’m Simon. I don’t care. Which is one reason why I think you should hire me as your personal finance consultant.