If you’re working with a financial advisor, be sure to keep the following in mind. After all, you’re paying them with your hard-earned money.
Rule #1: Understand how the advisor is paid
Some financial advisors are paid by commission, some are fee-only, and some are fee-based.
Advisors paid by commission sell financial products. Many of these products have no up-front deduction to cover the commission paid to the advisor. For this reason, many investors falsely believe that the advisor’s compensation doesn’t cost them anything. Moreover, where there are commissions, there are usually conflicts of interest.
A fee-only advisor is typically a fiduciary – that is, he or she will put your best interests first. With this fee structure, there are no inherent conflicts of interest. The advisor can be paid a one-time fee, or an ongoing fee based on assets under management.
A fee-based advisor wears two “hats,” meaning he or she can be paid via fees and commissions. While this is a more preferable fee structure compared to a commission-based advisor, it can still sometimes be difficult to identify when the advisor is wearing a given hat.
Ideally, you should be working with a financial advisor who has a fee structure backed by a fiduciary promise.
Rule #2: Beware of misleading statements
Reputable advisors (and there are many in the Greater Cincinnati area) won’t hesitate to address your questions about fees and costs of services and products once both parties have had a chance to sit down and understand the work involved.
Unfortunately, some advisors continue to operate behind the curtain of misleading statements such as: “This won’t cost you anything” or “I get paid from the marketing allowance of the company.”
A good rule of thumb is that when you hear this type of statement, understand that the advisor knows he or she is being overpaid.
Rule #3: Stand firm and ask this question
No matter if the product is an investment, annuity, life insurance policy, tax service or mortgage, you owe it to yourself to get an easily understood answer.
So, when your meeting is wrapping up, say this: “That sounds great. Let me ask you: if I take your recommendation, what will be the total compensation paid to you and any affiliated parties as a result of my investment?” (Carefully write down exactly what you think you heard. This will assure that you are both on the same page while minimizing the risk of future surprises.)
Practice asking this question in front of a mirror. It’s really a very simple question and shouldn’t be viewed as embarrassing, adversarial or combative. It’s a critical element to consider in making an informed decision about who to trust with your life savings.
The Simply Money Point
Many in the financial services industry are hoping you won’t ask probing questions. If you don’t get an immediate, simple answer and the hemming and hawing begins, that should be a red flag indicating it is time to move on to an advisor who is more forthcoming.
And to get more tips from our team at Simply Money Advisors about how to protect your retirement money, register for our free, one-day only “Retiree Beware!” workshop on September 11th.