It’s tempting to paint all financial professionals as either good guys or bad guys based on whether their compensation is fee- or commission-based.
But of course that isn’t fair. Just like in the movies, you can’t always judge someone by the hat he’s wearing. You have to look at motive.
When you mix commission sales with improper intentions, that’s when you have a problem. And unfortunately, I’ve seen quite a few people who’ve had their accounts “churned,” meaning the broker made excessive trades to generate commissions for himself and not necessarily in the best interests of the client.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
A tale of trust gone bad
For example, one of our clients, a widow in her upper 70s, out of loyalty stayed with the broker her husband had for years. He used that good relationship to manipulate her into not making any changes.
When she finally came to us, we could see that he was churning her accounts and she was losing money. He also had her in investments that were at much higher risk than she had asked for or wanted.
When we showed her what was going on, she fired the broker, and we positioned her in a way that was much more in line with her needs and goals. But it wasn’t an easy situation for her.
Breaking up is hard to do. I get that. Sometimes an investor will have put years into the relationship and can’t imagine moving on. Other times, the professional they’ve worked with is a good accumulator but fails when it’s time to make that fundamental and very necessary switch to the preservation stage. And sometimes brokers don’t even know how much their moves are costing their clients in hidden fees. They’re not being devious — just sloppy.
Fee confusion
If the broker doesn’t know about the fees, you can bet the client doesn’t. Recently, we had an 88-year-old man in the office who thought he was paying 1.4% on his accounts. But when we analyzed his portfolio, we found he was paying an additional 2.2% in hidden fees — putting him well over 3%.
We also learned that he considered himself a very conservative investor, but he was in a moderate portfolio, with much more risk than he should be carrying at his age.
We have a lot of conversations like this with potential clients, about what their objectives are and whether their adviser is truly listening to what they want to accomplish or just running his own path. It’s where the whole fiduciary vs. suitability discussion comes in — when you have to explain to someone about having an adviser who is truly looking out for their best interests and has no conflicts.
A fee-based adviser isn’t being pushed by his employer to sell certain products; he’s getting a percentage to manage your portfolio. If you do well, he makes more money. If your account decreases in value, he makes less. You’re a team with a common goal. And that’s critical.
Decision time
We see a lot of people who are blown away when they learn their financial professional is making money whether they do or not. They’re hurt or angry, or they just don’t believe it until we lay it out for them.
Then it’s up to them to decide: Is their money more important, or is keeping that relationship worth the added cost to their portfolio?
It’s a cliffhanger, for sure — a dramatic moment that may require an uncomfortable confrontation … just like in the movies.
Except this is real life. And it’s their nest egg — the money they’ve been saving a lifetime to pay for their retirement dream.
-
When Checkout Charity Gets Uncomfortable — and Maybe Even IllegalCashiers asking customers to 'round up' their total for charity can cross an ethical line if there's no disclosure about the benefiting organization.
-
Four Ways to Find Free Money to Pay for College: Affluent Families Can Apply, TooFamilies can access scholarships, grants and incentives by strategically positioning their students in terms of merit, skills and timing.
-
3 Tax-Smart DAF Strategies Advisers Can Put to Work for Clients During Giving SeasonDonor-advised funds can help clients maximize their philanthropy through front-loading deductions, donating appreciated assets and 'bunching' contributions.
-
How Financial Advisers Can Turn Compliance Into a Competitive AdvantageCollaboration, transparency and education can strengthen compliance and empower financial advisers to thrive.
-
Holidays Are a Rich Time to Talk Money With Young Adults: A Financial Adviser's Guide for ParentsThe most productive family financial conversations start with open-ended questions and a lot of listening. Don't let this opportunity pass you by.
-
How Women of Wealth Are Creating a New Model of Giving Through Family OfficesWomen who are inheriting wealth today are shifting from traditional philanthropy to creating sustainable systems to fund philanthropic gifts into perpetuity.
-
I'm a Financial Planner: This Retirement GPS Helps With Navigating Your Drawdown PhaseReady to retire? Here's how to swap your 'peak earnings' mindset for a 'preserve-plus-grow' approach instead of relying on the old, risky 4% rule.
-
Donating Stock Instead of Cash Is the 2-for-1 Deal You'll Love at Tax TimeGiving appreciated stock or using a donor-advised fund (DAF) this year would be smarter than writing a check to support your favorite causes. Here's why.
