Financial Advisors

Does it come as a surprise to know that most financial advisors earn their living by selling financial products? Currently the prevailing culture in the financial advice service business is more like that of a real estate agent than that of an accountant.

Real estate agents make their money by representing the seller and making a commission when the sale is made, whereas accountants make money by advising the client. Financial advisors are somewhere in the middle, being paid a commission for selling a financial product and many times collecting a fee for the trade from the client. Most people have no idea about just how insidious the culture of sales really is. Financial advisors sanctimoniously insist that they do what they do because of their concern for the clients. This may sometimes be true, certainly for some advisors. It clearly varies from advisor to advisor, company to company and from one situation to another.

What if dentists earned travel to Kauai just for getting their patients to switch from Colgate to Crest. Could a dentist like that be trusted to offer advice about your oral and dental health? Could there be a weekend junket to Reno behind every root canal he recommends to his patients?

Ideally, a financial advisor is someone who is an expert in the fields of personal finance and investing. Research has shown that many investors who pursues an independent investment strategies frequently make poor investment decisions and succumb to impulse buying. A financial advisor should understand, explain to the client, the fundamentals that drive companies and ultimately influence "the market."

The true role of the financial advisor should be to develop, monitor, and adapt a comprehensive investment plan that reflects the client’s personal financial profile and their investment goals.

When selecting a financial advisor, follow the same procedures as you would if you were hiring an accountant or a lawyer. As others how well their advisor has done for them.

Questions to ask a Potential Financial Advisor

What Financial Products are you Licensed to Sell?
This is important to know right from the outset, as it will define the types of investments and the plan the advisor is likely to recommend. If you think that you may want to purchase stocks or options sometime, look for an advisor who is licensed to act on your behalf.

How often will we meet to review my financial plans or answer my questions?
During the first meeting, financial advisors will be looking for as much information about you as you are looking for about them. Look for someone who listens carefully, asks specific questions, and understands what you are saying. The advisor is going to need to know your personal income and your long- and short-term financial goals. They will also ask you questions to determine your level of investment knowledge and experience and learn how comfortable you are with different types of investments. Select a financial advisor who is willing to meet with you regularly, perhaps once every three months. In general, the amount of time your advisor spends servicing your account will be governed by the amount of money you invest and the types of investments you make. You need an advisor who is willing to take the time to explain your investments, in as much detail as you require. You also want someone who you can easily understand, so that you get all the information you need, without wasting your time.

What Process is Used to Reach My Financial Plan? Your Role and Your Assistant?
The longer advisors have been in the business, the more likely they are to have assistants who will handle some aspects of your business. There is nothing unusual about this practice, but it is a good idea to know before you start dealing with an advisor. Ultimately, however, your advisor is the one responsible for investment decisions and directing the long-term development of your portfolio. Assistants are frequently responsible for carrying out the daily administrative requirements of your account.

How Are You Paid for Your Services?
Advisors usually earn a commission for every investment they buy or sell. Certain investments pay advisors more commission dollars than others, usually because they require a higher level of service. For more details on mutual fund charges, consult the prospectus that pertains to the mutual fund you plan to purchase.

The Bottom Line
It should be obvious that firms don’t award points for getting clients to pay down debt. Even though the professional thing to do would be to do exactly that, there would be a temptation that for some advisors to stray. It would be just too hard for some advisors to resist and recklessly naïve of the rest of us to think otherwise, human nature being what it is. I’m not suggesting the problem is rampant. But it very easily could (and very likely does) happen. Once is too often. And the only way to ensure that this kind of priority-morphing ethical bridge never has to be crossed is to blow up the bridge up altogether.

In the mean time, think about how you would feel if your HMO offered an all-expenses paid week in Rome for the top 3% of all physicians in your group who recommend the most drugs instead quadruple by-pass surgeries. Given the sanctity of what’s at stake, that sort of conduct would just re-enforce your faith in humanity, wouldn’t it?