Should Financial Advisors Get Paid to Sell Products?

This guest post is by Barbara Friedberg, founder 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.

We’re both members of Yakezie, one of the world’s largest networks of personal finance and lifestyle bloggers. Recently 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.

Please note: The views and opinions expressed in guest posts are those of the author and do not necessarily reflect the views and opinions of Happy Simple Living.

Financial Advisors Who Get Paid To Sell Products Bother Me

How it all Started

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?

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, 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 Roger Wohlner at The Chicago Financial Planner, 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.