Thursday, August 12, 2010

Financial salesmen have a built-in conflict of interest with you, their client

Do you really think that your "advisor" has only your best interest in mind?  Not if he works on commission, which about 95% do.  If he works for a brokerage firm (Merrill Lynch, UBS, Wells Fargo, JPM/Chase, Wachovia, Raymond James, Edward Jones, etc, etc), he's a salesman working on commission.  Ditto for the insurance based companies like Ameriprise, AXA, and others.  Oh, and don't be fooled by the "fee-based" advisor moniker.  That just means that you're paying him a fee and a commission. 

"Oh, my advisor is independent."  If he has a broker-dealer affiliation, that doesn't matter at all.

These salesmen are, at least under the current system, held to a standard of "suitability" by FINRA.  That simply means that they are required to sell  you a product that is, according to a very broad definition, suitable for you.  It doesn't mean that it's the best performing product, the least expensive, or any good at all.  What it usually means is that it's the product that pays the broker the highest commission or the "flavor of the week" that his firm is pushing (and he's probably eligible to win a trip to Maui if he sells the most in his branch).  It doesn't take a rocket scientist to figure out that this is not the best business model for the client (although it has historically been a great one for the salesman... oops, I mean "advisor").

Is there an alternative to this mess?  Yes!  And, you should know about it.  It's called the Fee-only Registered Investment Advisor (RIA).  No, not "fee-based".  That's the brokerage industry's term that is designed to be similar enough to confuse you.  Fee-only RIAs are required to put your best interest first and their compensation method completely eliminates any conflict of interest.  All fees are paid directly to the advisor by the client and are clearly disclosed.  There is no incentive for this type of advisor under this compensation structure to do anything that is not in your best interest.  You can find them, but you'll have to look because they are only about 5% of the advisors out there.

Oh, and don't be misled by designations.  Being a CFP (yeah, CFP board, I left off the registered trademark logo!) or a CFA or a CLU or an XYZ doesn't matter if the advisor is  working on commissions. 

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