When it Comes to Financial Advice, Follow the Money

January 19, 2012

As the election year begins, there’s a lot of concern about money in politics and how it can be used to corrupt politicians and buy votes. But politics isn’t the only profession in which money can be a problem. The same can be said for financial planning too.

I remember when I first started my financial career, I chose to work at an investment firm that had a reputation for integrity among the large full service brokerages. While I never experienced the company trying to dump poor investments onto clients out of their inventory and they didn’t have proprietary funds to push, I did notice that they focused exclusively on only seven “preferred” mutual fund families. We only met with representatives from those fund companies and got rewards based on how much of those funds were sold. Selling a fund outside of the preferred families was frowned upon even if it was arguably more suitable to a client’s needs. It’s not that the brokers I met there weren’t honest, but they generally didn’t have a financial background before coming to the firm and learned most of what they knew from training that was centered around how to sell those particular funds. For that reason, they may have believed they were doing the right thing based on what they knew. (Several years after I left, the company was sued and had to pay $75 million for not adequately disclosing the fact that they were receiving extra financial incentives from those funds to sell them to clients.)

As I became increasingly uncomfortable with this arrangement, I decided to leave the firm and join an independent brokerage firm that was selling investments through several credit unions. The nice thing is that we were no longer steered toward any particular company so I could try to find the best deal for my clients. However, there was still a conflict of interest in that I wasn’t paid for recommending a product that I couldn’t sell like a no-load mutual fund. Since we were only compensated by commission, if I didn’t sell, I didn’t eat. Fortunately, I found several investment vehicles that I could sell with good conscience because I felt that they were worth the additional cost. But after a few years, they were closed to new investors. When I couldn’t find adequate replacements, I decided to leave the commissioned brokerage world altogether and join a discount brokerage.

There were several advantages of working at the discount firm. First, we were paid a salary so I didn’t have to worry about having to sell products to pay the rent. In fact, we didn’t sell products at all. Instead, our bonus was paid on the revenue the company made on our book of business, which was largely a factor of how much assets we had and how many of our clients were paying a fee for advice of questionable value. While we weren’t incentivized to push certain products, it was still tough to be an objective and unbiased financial planner. You could make a lot more money by convincing wealthy people to move money from other brokerage accounts and sign up for one of our advice services than you could by helping people budget and plan for retirement. In fact, telling a client to pay off debt or put money in a 529 plan or even their 401(k) could actually cost you money.

My final stop before coming to Financial Finesse was at an independent fee-only registered investment adviser firm. Unlike my previous employers, the company had a fiduciary responsibility to act in the best interest of their clients. However, we were still compensated by gathering assets because the firm’s fee was a percentage of the assets under management. This presented the same conflicts of interest regarding sales vs. financial planning. In addition, since we only worked with people who had a minimum amount of assets, many of the people who most needed our help didn’t qualify for it.

So how can you find a financial planner that doesn’t have these biases? First, see if your employer offers financial planning or education as an employee benefit. If the planner is paid a straight salary, like at Financial Finesse, and doesn’t represent a financial services company, you can get the best of both worlds: unbiased education and guidance for no cost at all.

If you don’t have this benefit and are just looking for some basic investment recommendations, you might be able to get some free advice from a discount brokerage like Charles Schwab, Fidelity, or TD Ameritrade. Just be aware that you’ll have to pay a fee for more comprehensive financial planning. In that case, your best bet would probably be an independent financial advisor who charges either an annual retainer or an hourly fee. You can search for the former at the Alliance of Cambridge Advisors and the latter at the Garrett Planning Network. Both are networks of independent financial advisers who don’t sell any products. You can also get unbiased advice at a lower cost through sites like myfinancialadvice.com and learnvest.com.

Keep in mind that objectivity is only one of many qualities to look for in a financial planner. The planner’s education, experience, ethical standards, areas of expertise, personality, and accessibility are some of the other criteria to consider. One way to screen for the first three is to look for planners with the CFP® credential, the most recognized designation in financial planning. You can search for local CFP® professionals at letsmakeaplan.org.

It’s a good idea to interview at least 3 prospects to see which is the best fit for your needs and personality. Of course, don’t forget to ask how the planner is compensated. Some planners may not see anything wrong with potential conflicts-of-interest but as Upton Sinclair once said, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”