Until 15 years ago, when you dealt with a financial advisor (regardless of whether they called themselves a stockbroker, investment executive, financial planner, etc.) you paid a commission for a transaction. Of course, you desired to get some very good advice before making a transaction.
But the fee-based business has grown where the advisor does not charge you for transactions, but rather an annual fee for handling your portfolio or an hourly fee for advice. Fee based advisors say that commission advisors have an incentive to sell something to generate a commission. Commission based advisors ask why you should pay a continuous fee if your portfolio remains unchanged or loses money for long periods of time?
Who’s right? I contend that this question is not the important question. How you pay an advisor is far less important than many other factors.
When you work with a trustworthy advisor, how you pay them is a matter of which system makes sense for you and will not be determinate of the level of happiness and comfort that you have with your investments. Both the commission based and fee-based advisor can obtain and recommend the same or nearly identical investments to you.
That being said, here is a list of the five most important things you should check before you worry at all about fees or commissions:
1) Where can you check out the advisor? The financial services business is intensely regulated. Look for their regulatory agency and then go online and do some digging. This may be the SEC, FINRA, or maybe the state department of insurance. They all have websites that show if there are any complaints against the advisor and if those complaints have been resolved. Ask the advisor that you are meeting with who regulates them. Yes, this is a fair question! If an advisor is hesitant to tell you where you can check them out, then run-don’t walk-for the door! Remember just one name: Bernie Madoff.
2) Can you talk to clients that have been with the advisor for more than just a few years? A good advisor will have testimonials and even people that potential clients can call to talk to personally. Check a few of them out.
3) What area do you specialize in? You do not go to the general practitioner for heart surgery. Likewise, you should not go to a stockbroker for advice on the best safe and insured fixed income products. That will not be their specialty. Most advisors today have their niche, and for good reason: There are thousands of products and companies in each financial planning category. Today’s financial advisor cannot know them all. Make sure you are with an expert!
4) What company/companies is the advisor recommending? Check the company out (mutual fund company, stock, annuity company, etc.) that the advisor is recommending. How long have they been in business? Why do they like them? Usually, the advisor is just a conduit between you and the actual products they represent. This leads into the last question you must ask.
5) What happens if they (the advisor) disappear? If they do not have a contingency plan in place for their practice, that’s a red flag. They obviously do not have much foresight with their business plan; therefore they may not have much foresight with your money! You want to know what happens to your accounts and financial well-being if something happens to the advisor.
Finally, remember-all advisors get paid. In the ends fees verses commissions is really immaterial. Keep your eye on the five questions listed above. Remember, it’s your money-which helps determine you and your family’s well being both now and in the future.
We will spend a week shopping for the best buy on a flat screen TV, but very few people actually check out the guy or girl who is going to be steering all of their family’s money. Take some time to do your homework. You’ll be glad you did! Remember, you can’t afford mistakes!
By: Jake Yetterberg