Whenever conflicts of interest exist you can be sure that some people will take advantage of them. The pension consulting business has a laundry list of possible conflicts: Pay to play, proprietary products, revenue sharing, and commissions to name just a few. Disclosure is almost nonexistent, and fiduciaries are generally inept. In theory, pensions are subject to extensive oversight, but legislation and regulatory enforcement badly lag the situation on the ground. With both regulators and plan sponsors asleep at the switch, it is hard to imagine a more target rich environment for a sales organization.
For plan sponsors, the Gordian knot is a simple exercise in comparison to untangling the conflicts embedded in a bundled product pension solution. Half of pension consultants receive compensation from the managers that they recommend. So, it shouldn’t be a big surprise that those conflicts impact both price and performance in a meaningful way. Continue reading →
Stockbrokers, who sell investment products for commissions, tell investors they are financial advisors because it reduces sales resistance and improves their odds of making sales. They are breaking an industry regulation when they call themselves advisors, but the claim is verbal in a sales pitch. Investors have no record of what was said to them so the sales reps get away with it.
It is easy to recognize stockbrokers and other types of sales reps. They have two distinguishing characteristics that are difficult to hide. You just have to know the right questions to ask. First, “What licenses and registrations do you hold?” And second, “How are you compensated for your advice and services?” The advisor is a sales rep if the answer to the first question is a Series 6 or 7 license and the answer to the second question is commissions. Continue reading →
In the good old days, there was a straightforward relationship between investors and stockbrokers who were paid commissions to help investors trade their portfolios. They recommended stocks for purchase and sale based on input from analysts that worked for their firms.
That whole model fell apart in 1975 when brokerage commissions were deregulated. This change spawned a new type of firm that was loosely described as a discount broker. Then, when you needed help on how to trade, you had a choice: the traditional full service brokerage firm or the new upstart discount broker. Continue reading →
Most investors trust their financial advisors. They may even consider their advisors to be friends. They fail to recognize advisors want to be liked. Advisors know investors will tolerate bad results a lot longer if they forge a friendly relationship.
The bottom-line is advisors do not volunteer information that would cause investors to reject their sales recommendations or terminate relationships. It is not in their best interests to provide this information. And, investors who don’t know what they don’t know do not ask critical questions that impact their advisors’ recommendations and results. They have a hard time believing friends will take advantage of friends for money. Continue reading →
Fee-Only, Independent, Registered Investment Advisors are an entirely different animal than the brokerages, broker-dealers, insurance companies, and banks that have traditionally dominated the investment advice market.
The traditional commission based sales model is fatally flawed and cannot be fixed. It’s almost impossible to provide fiduciary standards of investment management if the advisor is commission based. External influence and production pressure make any recommendation suspect. The investor’s best assurance of objective advice is the ironclad separation between the advice and brokerage functions. This is why we think fee-only compensation is so important. Do you really want to pay for tainted advice? Continue reading →
Market Risk and Behavior Risk are well known and frequently discussed. But, there is another type of risk that is often overlooked; The Advisor Risk.
Investors that recognize that they don’t have the time, knowledge or inclination to deal with market risk, and/or the discipline to deal with their own behavior risk may seek advice, and unwittingly run into a third level of risk: The risk that their advisors are either not working in their best interest and/or are incompetent. This third risk is little discussed or appreciated. But, advisor risk is not trivial. Countless investors that delegated their investment decisions to so-called professionals have been devastated during the recent bear market. Continue reading →
Most investors are not aware there are financial advisors and sales representatives (reps) who have very different services, agendas, and business practices. You can blame sales representatives for the confusion. Most of them refer to themselves as financial planners or financial advisors because they know investors do not want sales reps investing their assets. If they disclosed their real status, they would lose sales.
Following are five tips that will help you quickly and easily determine who are the real financial advisors and who are the sales representatives who are masquerading as advisors. Make sure you select a real advisor by requiring documentation for the following information. Continue reading →
Most financial advisors report gross performance because the number is always higher, perhaps two to three percent higher. And, most investors accept the numbers because they do not know they should be asking for performance reports that are net of all expenses. The higher the expenses, the more likely the advisor is to report gross results.
There are several layers of expense that you should be aware of. If you know all of the expenses, you can add them up and deduct them from your performance yourself. Or, you can use a free tool that resides on the Investor Watchdog website (http://www.investorwatchdog.com/) that will obtain expense data for you. Continue reading →
One of the most frequent sales tactics that is used by financial advisors is convincing you they are financial experts. This is a critical step in the sales process because advisors know you do not question the advice of experts. You will buy what they are selling because they are experts.
What if the advisors were not financial experts? How do they convince you they are experts? Another popular tactic is to use words they believe you won’t understand. After all, one definition of an expert is a person who knows more than you do on a particular topic. The use of confusing terms helps advisors convince you they are financial experts. Continue reading →
Investment expenses are complex and advisors are reluctant to discuss them. They don’t want you to know what you pay in total fees because you may not buy what they are selling. And, they know you may be particularly sensitive about the fees they earn in down markets when you are incurring big losses.
If you want to know more about the expenses you pay, you will have to ask the right questions and you better obtain your advisor’s responses in writing. Documentation is a lot better than verbal information that is subject to recall and is easy to deny later. Continue reading →