Sometimes survey results are shocking. So it was with a recent survey of investors showing that over half of those answering either had no idea how their advisor was paid or thought that he or she worked for free. That is an amazing statistic that speaks to the need for transparency in the financial services industry. So when you’re working with an advisor, be sure to keep the following in mind.
Beware of misleading statements
Reputable advisors (and there are many in Cincinnati) 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.
Understand all the costs
Keep this in mind as well: many financial products that are sold have no up-front deduction to cover the commission paid to the advisor. For this reason many investors falsely believe that their advisor’s compensation doesn’t cost them anything. Nothing could be farther from the truth. In fact most of these types of products hide a commission that is higher than those which are much more transparent to you.
Check the surrender charge schedule for early withdrawal from these products. The higher the initial percentage owed and the longer the surrender charge period, the higher the commission paid tends to be. In spite of claims to the contrary, the main reason for surrender charges on any financial product is to enable the issuing company to re-coup the commissions paid up-front. If you don’t stay around long enough for the company to earn back those commissions, you have to pay any remainder when you leave.
Stand firm and ask this question
So whether the product you are being pitched is an investment, annuity, life insurance policy, tax services or mortgage, you owe it to yourself to get an easily understood answer. After you have listened carefully to the advisor’s presentation 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?” Practice asking in front of a mirror. It’s really a very simple question and should not be viewed as embarrassing, adversarial or combative. It is rather a critical element to consider in making an informed decision.
Don’t let your embarrassment cost you money. It’s what many in this business are betting on. If you don’t get an immediate simple answer and the hemming and hawing starts, that should be a red flag indicating that it is time to move on to an advisor who is more forthcoming.
And since we believe that transparency is so important, here is a last suggestion to assure that you know clearly what you are getting. After the sales pitch has been made, you should carefully write down exactly what you think you heard. Include the expected performance, any guarantees and the compensation previously discussed. Ask your advisor to sign and date it. This will assure that you are both on the same page while minimizing the risk of future surprises.
We believe that any competent advisor who feels that he or she is being fairly paid for the services provided should have no problem putting in writing their total compensation in clear, easily understood language. If this important information is not voluntarily disclosed, you owe it to yourself to demand it.
Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email firstname.lastname@example.org
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