Over the weekend an unfortunate story came out about a couple that was “bamboozled” by a financial advisor. An excerpt From Reddit:
SO a week or two goes by. And I see a ~$30 charge go through for “disability insurance”. WHICH I TOLD HER I DIDN’T WANT!! And I just realize… this doesn’t feel good. It doesn’t seem right. She’s not listening to what we want. She still hasn’t addressed out interest in CD/mutual funds/stocks that we initially came to her for. I spend the weekend doing my due diligence- spending a few hours on r/personalfinance, NerdWallet, just googling in general about what husband and I should really be doing. I decide to call the whole thing off with Northwestern.
No, this isn’t a person losing millions in a ponzi scheme. It isn’t the Madoff type story that dominates the news headlines, but it is these type of financial “crimes” that happen much more frequently. The financial advisor walks away with a high commission, and the unsuspecting couple walks away with a high cost product they don’t need or want. Luckily, this couple realized the atrocity right away and were able to stop it, but many others don’t know they have been taken until years after. This post discusses things you can do to make sure that you aren’t ripped off by a financial advisor.
Work with a Certified Financial Planner™: Go and see a doctor, and you know the person that has been helping you has had years of education and experience. Visit a lawyer, and you can typically trust that she has spent hundreds of hours studying her craft before meeting with you. Set a meeting with a financial advisor, and you could be meeting with a person who has no financial planning experience, and simply got his insurance license yesterday. Unfortunately, there are no barriers to entry to becoming a financial advisor, and people with little or no financial advising experience can call themselves a financial advisor.
I’m not saying that all CFPs are great financial advisors with perfect intentions Still, if you are working with a CFP you know you are working with someone that spent years studying to pass the test, and also has at least 3-years financial planning experience. Working with a CFP should be the starting point for finding the right financial advisor for you. If you have nowhere else to turn, you can use the Find a CFP Tool online.
Look up your potential financial advisor on BrokerCheck: Thankfully, there is already a resource to research if your financial advisor has previously ripped off people. I’ve written before how you can use BrokerCheck for due diligence on a potential financial advisor. BrokerCheck will give you an idea of the experience of a financial advisor, where they have worked in the past, and most importantly; if your financial advisor has any disclosures, or formal complaints. Also, you can see how these complaints were settled. You should be concerned if a potential financial advisor has a rap sheet of past complaints.
If you can’t find a person on BrokerCheck, this should also raise a flag. In the example above, there is a good chance that the “financial advisor” was not registered on BrokerCheck. Insurance agents aren’t required to register with FINRA, unless they are allowed to sell investment products. BrokerCheck is a fantastic tool, that unfortunately not enough people know about.
Find out the total fees that you will pay: This should come as no surprise, but the financial advisor that you are working with is not doing it for free. There are two types of financial advisors; commission based brokers and fee-only financial advisors. Commission brokers will sell a product, like an annuity or a mutual fund with a load, and earn a commission. Fee-only financial advisors get paid a fee for providing advice, this might be a flat fee or a fee-based on the total assets the advisor is managing. Find out the total commissions that the advisor will earn or the total annual fees you will pay the advisor. Also, almost every investment has an annual expense ratio, which negatively impacts performance.
It is important that you understand all of the fees that you will pay an advisor; these fees can include commissions, yearly fees paid to the advisor, and yearly investment costs. My rule of thumb is that you should never pay over 2% in total annual fees, and closer to 1% should be more realistic. If an advisor explains that your total annual fees are over 2%, you can find better elsewhere. Even worse, is when an advisor tells you there are no fees or commissions. That advisor is lying to you, or not smart enough to know the total fees. Either way, never work with someone who claims there are no fees.
Interview multiple financial advisors: In the situation above, the couple realized something was fishy right away. They didn’t trust the insurance salesperson, but as she said, “maybe we do need more life insurance.” If they spoke with another financial advisor, an advisor not an insurance agent, likely they would have received different advice. It’s unlikely that every advisor would suggest high fee whole life insurance policies to this family.
Selecting a financial advisor can be stressful, and you surely have better things to do then meet with a bunch of stuffy financial advisors in fancy offices. Still, finding the right financial advisor is important, and that may take time. You are the potential client and you are the one in control. Have the advisors send you proposals; this should include total fees, past performance records, and reason for the recommendation. Speaking as a financial advisor, this is a request that I hate to receive, but also I know is important. Remember, financial advisors are working for you, make them earn their keep.