The investment advisor business is a hard field to break into. There’s a ton of licensing and test-taking. Firms don’t hire fresh off the street. Rather, they seek to cherry-pick successful advisors from other firms.
Why? Because the successful investment advisor has built up a book of clients, the result of years of networking. It’s just logical: Why wait 10 or 15 years for a beginner to build a practice when you can pluck the best one away for slightly better terms?
What are those terms? Well, this is the part most advisors would rather than divulge. They get paid by a variety of people, not just you.
Think about real estate agents and insurance sellers. It’s common knowledge that they are paid by several participants in every deal — the buyer and the seller, for instance, or the insurance provider itself.
Business as usual, no big deal. Well, an investment advisor is no different. Here are three things they probably don’t want to share up front with new clients:
1. “Commissions cost you money, not me.” Financial advisors sometimes make the case that the commissions they earn from selling you mutual funds and insurance investment products don’t affect you personally. Yet the money obviously comes from somewhere, right?
You have to remember that there is no free lunch. In the worst case, he or she will recommend products based on how much those products pay them, not whether it’s the best investment for your needs.
2. “Fees come out of your pocket, but you’ll hardly notice.” Like an experienced pickpocket, Wall Street knows just how to tap your wallet in tiny, painless increments over long periods. The amounts seem inconsequential at first.
Yet fund fees add up, and soon they are snowballing. An apparently small fee attached to a mutual fund will cost you between 30% and 50% of your total return over decades of investing. Hard to fathom, but true.
3. “I get paid bonuses for moving certain products.” You might think your advisor is keen on that specific fund or annuity, but what you don’t realize is that he or she is compensated even more for helping to sell products that favor the suppliers — big brokerage firms.
It’s a lot like asking a waiter what’s “good” on a menu. Chances are, he or she gets a nice SPIF (for sales performance incentive fund) for moving the fish because the restaurant owner got a deal buying a lot of snapper all at once.
You can avoid a lot of these problems by asking a few simple questions, such as “Can you put your total fees in writing?” If you can’t get that question answered, you already know that you will pay advisor fees you can’t even see.