Today’s guest posting is by Barbara Friedberg of Barbara Friedberg Personal Finance. I love Barbara’s blog, which is full of ideas to make your personal and financial wealth grow. She takes complex topics and breaks them down so they’re more understandable; she also writes in a very down-to-earth way and shares her personal experiences, which makes for interesting reading. (For starters, check out Barbara’s ‘My Story‘ page, where she shares how her father overcame a childhood of poverty. I’ll give you a hint – it involves sandwiches and pianos.)
We’re both members of Yakezie, one of the world’s largest networks of personal finance and lifestyle bloggers. This month, select Yakezie participants were paired up to exchange guest posts on each other’s sites, and the topic is, “What is your biggest financial pet peeve?” I know you’ll enjoy her take on this compelling topic:
Financial Advisors Who Get Paid To Sell Products Bother Me
When I first began investing while in my 20’s, I went to a stock broker who sold me funds set up by my broker’s investment company (proprietary funds) with really high fees.
I didn’t know any better!!
I didn’t think about how he was paid, and since I didn’t see his fee up front, I thought this was a good situation. “Wow, I’m getting this help with my investments from a professional FOR FREE!”
I didn’t realize this guy was a SALESMAN!!! The more he sold me, the richer he got!
What is the Background of These Financial Professionals?
The Investment Answer gave the best explanation I’ve read for the variety of financial advisors and designations. Look, I’m a portfolio manager and I can barely keep them all straight, so how can one expect the public to understand the myriad of people trying to “help” manage your money?
Here’s my “Cliff Notes” version of this tricky subject.
Retail Brokers, Financial Advisors, and Financial Consultants
What are they?
- Agents who work for a firm and sell that firm’s products
How they get paid:
- Either by commission on a sale or buy of a financial product for you.
- Or, a single fee for managing your account.
What’s the problem?
- If they only get paid when you buy or sell, THERE IS A CONFLICT OF INTEREST and a big motivation for the advisor to encourage you to make more trades!
- Even if they charge a fee to manage your account, they are encouraged to sell the firm’s approved “products”.
- There are a variety of “designations” and titles these salespeople hold; Registered Representative, Certified Financial Planner, Chartered Financial Analyst, and more. Yet, no designation is legally required.
This type of arrangement really annoys me.
Who Can I Trust?
According to Karen Blumenthal, in When Your Advisor Can’t be Trusted, WSJ, March 12-13, 2011, a “registered investment adviser” must act in the clients’ best interests, or as a fiduciary. So that’s one factor to consider.
The other key factor to consider is compensation. If you want to hire a professional to manage your money, instead of doing it yourself, make sure you get someone whose interests are ALIGNED WITH YOURS. Get his/her compensation methods up front. If the advisor charges a percent of your assets under management, then the more money you make, the more money the advisor makes!!!!
An Independent Fee-Only Financial Advisor whose experience, education, and philosophy is in line with yours is a good place to start.
Anyone with a CFA designation (CFA) has the “gold standard” of designations. The CFA holder passed several difficult exams, worked in the field for many years, and has passed the equivalent of several years of graduate level coursework.
Go to the Financial Industry Regulatory Authority (FINRA) or Securities and Exchange Commission for some great information on the subject. Two of my favorite Independent Fee-Only Advisors are The Chicago Financial Planner, Roger Wohlner, and Dan Goldie, an author of The Investment Answer.
What is your experience with financial professionals? If you are a financial professional, do you agree or disagree?
This is a guest post from Barbara Friedberg, editor-in-chief of BarbaraFriedbergPersonalFinance.com. Learn personal finance from a real life Portfolio Manager. Visit her site for a FREE eBook, 20 Minute Guide to Investing.
[Editor’s note: The views and opinions expressed in guest posts are those of the author.]