For years I’ve witnessed how we give too much of our power away when we visit our Doctor’s office. Instead of asking why they recommend we do x or y, we blithely follow whatever recommendation is made. After all, they’re the one with MD next to their name, so who are we to question their instructions?
Unfortunately, the same reaction happens far too often in the financial world. The following is a true story and a perfect example of how we unwittingly give our power away when it comes to money.
John (not his real name) is a friend I’ve known since childhood. He’s reinvented himself many times since graduating from college. Yet the one thing that has remained constant in his life is his dysfunctional relationship with money.
If you’ve ever had a friend that used the “I’m broke” excuse more times than you can remember, then you can relate. Bankrupt twice, John seems unable, or more likely unwilling, to live within his means. He does have one lucky attribute that has saved his behind many times - John was born with Hollywood actor good looks. Each one of his three past wives have been very rich. Like caring for a bird with a broken wing, John’s past wives have all come to his financial rescue, until they didn’t.
Are you kidding me?
Now here’s where the story gets really interesting. About five years back after divorce #3, John received zilch because of strong pre-nup his ex-wife's attorney had drafted. John was up against a wall and ultimately sought out a fraternity brother who is a big honcho at one of the usual suspects on Wall Street.
Desperate and in need of a job, his buddy hired him as, get this, a ‘Financial Advisor’. I kid you not! After going through, what amounts to a 6-month crash course of how to sell crappy-stock-no-one-wants and expensive, high commissioned annuities no one needs, John can now call himself a full-fledged ‘investment advisor’.
With that title bestowed upon him for no good reason, many unsuspecting consumers will now follow John’s sales pitch, excuse me, I mean his 'advice', because they assume he’s offering guidance that’s in their best interest. This could not be farther from the truth.
Is your financial advisor working in a fiduciary capacity?
Thanks to the Trump administration along with the Republican majority in Congress and the large wire houses on Wall Street, what was to become a fiduciary standard code of conduct for providing advice to clients with retirement investments, such as IRA’s, 401k’s and 403b’s, that proposed requirement has now been successfully taken off the table.
Working in a fiduciary capacity, which is how I, along with many other highly ethical financial advisors practice, means we put the interests of our client’s first and ahead of our own interests, period, full stop. Not holding yourself out as a fiduciary advisor allows you to use what’s called the “suitability standard”.
Instead of having to place his or her interest below that of the client, the suitability standard only requires that the advisor has to reasonably believe that any recommendations made are suitable for the client, in terms of the client’s financial needs, objectives and unique circumstances. With this BS standard, investment advisors who are fee-based may be incentivized to sell their own products ahead of competing products that may be lower in cost. This is how they make their commissions. It is also how many trusting clients discover too late that their 'advisor' was looking out for their own personal interests ahead of their clients.
Caveat emptor is Latin for “Let the buyer beware”. So with that guidance, let’s go back to my buddy John for a second.
John, like his fellow sales people, have very aggressive sales goals that must be met in order to retain their jobs. As admitted to me by John, once a week, each salesperson in his department are given financial products to unload, excuse me again, ‘to sell’, to customers. On that list are products ranked from high to low in terms of commission payouts to these sales reps.
Now imagine you’re John. You see financial products that you highly suspect are pretty lousy long-term investments, very expensive fees and front or back end loads. The lousiest of them all just happen to have the highest payout of commissions to you. Very tempting, right?
In to the office walks a couple in their mid-60’s, ready to retire soon, and in need of financial advice. John looks at his list of inventory that needs to be sold, and suddenly that lousy annuity with a 12% upfront commission becomes very attractive. Does selling this couple an overpriced annuity that they do not need, violate the suitability standard - no, it does not. This is unbelievable.
With 10,000 boomers turning 65 every day for the next 10+ years, there’s a lot of money to be made. Every retirement planning conference I attend lately describes this demand for investment advice boomers will need as a ‘gold rush’.
If you’re now or will soon be seeking guidance on preparing for retirement, here’s a few tips to leave you with so you don’t find yourself purchasing fools gold:
- Always work with an advisor that works and holds themselves out as a fiduciary.
- Make sure your advisor rolls up their sleeves and prepares a comprehensive financial plan that illustrates a clear and easy to understand retirement income strategy
- Once every year, review your annual financial goals and compare actual performance to projected performance
- Ask to see your financial advisors credit score. My FICO score last month was 835 and I made a copy in case any new client requests to see it. Remember, credit scores often identify the credibility of your advisor.
- Always, always, always keep in mind this crucial point. No one will care about your money more than you.
Be Smart: Managing and dealing with money is a stressful experience for most people. With that said, seek out an advisor that not only works in a fiduciary capacity, but also aligns well with your personality and core values. Make sure you’re working with someone that will talk and explain recommendations in plain English, not money-speak.
Most importantly, if you’re shopping around for an advisor to help you plan your retirement, never forget my friend John’s story. He’s the first to admit that he can’t believe someone with his past and current money troubles is advising clients on their money issues.
When you interview advisors, do your best to ascertain if you’re meeting with a salesperson masquerading as a financial advisor or are you meeting with an advisor that truly cares about your financial wellness?
And finally, please, find your voice and ask questions until you’re fully satisfied with the answers. And remember, financial advisors come in all shapes and sizes, so find one that you can really relate to. Because when you do, you’ll feel the comfort and joy of having a trusted relationship with a professional that has your back. And that’s how you achieve peace of mind around your money.