You have seen the headlines. Financial service firms have paid billions of dollars of fines for cheating investors. So, how does this impact you? More than you might think and you do not have to buy investment services or products from the firms in the headlines. You just have to be unlucky enough to select the wrong type of financial advisor.
Before I describe an easy way to protect your financial interests, you should know that titles mean absolutely nothing in the financial services industry. Anyone can claim to be a financial planner or advisor, whether it is true or not. Wall Street representatives select titles that will reduce your sales resistance and facilitate the sale of investment and insurance products.
Consequently, you have to look past titles and look at how advisors are compensated to determine their role in relation to your assets. Review our Infographic ‘How Does Financial Advisor Compensation Impact You?’ to understand the differences.
There are two distinct types of advisors and there is one critical difference that differentiates them – how they are compensated.
1. The advisor is really a salesman who is paid commissions by third parties to sell you investment products. You do not pay the advisor. A third party, like a mutual fund company, pays a commission to the advisor.
2. The advisor who is paid a fee for his knowledge, advice, and services. The fee may be hourly or fixed for planning services and asset-based (% of assets) for investment services.
You want the financial advisor working for you and not a mutual fund company. You also want control over the advisor’s compensation. In other words, you pay a fee if you are satisfied with your investment results and you can stop the fee if you are dissatisfied. You control advisor compensation and not a third party whose principal interests may compete with yours.
The rule is simple: Select advisors who are compensated with fees that you control and avoid advisors who are paid commissions by third parties. You need an advisor who provides ongoing advice and services for a fee. After all, this is how you compensate other professionals (CPA, attorney) you rely on for their specialized knowledge and services.