There are a lot of financial professionals out there. According to industry estimates, there are more than 400,000 individuals who hold themselves out as financial advisors in the United States. You see life insurance agents, stock brokers, annuity salespersons, certified financial planners and other professional designations.
There are over 150 designations that financial advisors use in U.S. . Some of these designations require very little training or much financial expertise. Some even do not require the advisor to follow any type of code of ethics. And what do these advisors want? Your money!
They all want to be able to assist you with investing what you have saved. But you have worked hard all your life to save for your retirement. You want to protect that investment so that you can be provided for during the rest of your life. How do you know your financial advisor is looking out for your best interest or just looking for a sale.
Over the years, I have seen numerous clients whose financial advisors have looked out for the advisor’s own best interests rather than the client’s. How can you protect yourself from financial advisors who just want to separate you from your money. The best thing to do is your homework. If you do, you can make informed investment decisions and protect that nest egg.
In a recent AARP Bulletin, there was a list of seven steps to take when getting financial advice. Here is my version of the seven steps to help you choose a financial advisor.
1. Ask your financial advisor if he or she uses the fiduciary standard or the suitability standard with your investments. A fiduciary is someone who acts in your best interest and holds your interest above their own. Some financial advisors are required by their license or professional designation to follow this fiduciary standard; many are not.
The financial advisors who do not follow the fiduciary standard, follow the suitability standard. All these financial advisors following the suitability standard have to determine is that the product is suitable for you based upon your age, risk tolerance and other factors. These advisors do not have to hold your interest above their own.
Some financial advisors I call “chameleon” advisors because they change back and forth between the fiduciary standard and the suitability standard depending upon which product they are selling. You should want your financial advisor to use the fiduciary standard for all your investments all the time.
2. Check your financial advisor’s qualifications. Ask your financial advisor where he or she went to college, what they studied and what training they have. Financial advisors can be licensed and/or registered at both the state and the federal level. For state licenses, check them out on the Michigan Department of Insurance and Financial Services website at http://difs.state.mi.us/fis/ind_srch/ins_agnt/. You can do the federal verification check on the Financial Industry Regulatory Authority website at http://www.finra.org/ and follow the BrokerCheck links.
3. Get a financial profile. Make sure that your financial advisor asks enough questions to understand you, your investment goals and objectives, your risk tolerance and what investments you currently own. If an advisor tries to peddle something without knowing you or what investments you own, walk away. If an advisor wants to sell you an annuity that will result in annuities constituting more than 25% of your investment portfolio, walk away.
4. Ask about fees. How is your financial advisor being compensated? He or she does not work for free. If your advisor says it costs you nothing or the company pays me, walk away. Ask what commission is being paid to them for any product being sold, especially annuities. If the advisor refuses to say how much his or her commission is, walk away.
5. Be on the lookout for investment results or other guarantees. Many advisors will emphasize what a certain product or fund has earned in the past. This is no guarantee of future returns. Be especially wary of any “guarantees” in any annuity.
I have seen annuity rates of return guaranteed only if you die. I have also seen high teaser rates of return in an annuity that are guaranteed for only a short period of time such as six months, which are then recovered with higher internal charges and administrative expenses later on.
Often there are what I call “weasel clauses” that allow an annuity company to get out of a guarantee. I had one client who invested his life savings of $800,000 in a 3% “guaranteed return” annuity with a nine year surrender charge penalty, only to find out that after the first year, the annuity company exercised an option in the prospectus that reduced the “guaranteed return” to 1½%. Ouch!
Then there are the annuities whose guarantees of withdrawals without surrender charge penalties that can only be exercised in a 30 day window every five years. There are also the IRA annuities whose guarantees of rates of return and/or penalty-free withdrawals could only occur if you never ever withdraw more than the annual required minimum distribution.
6. Know your investments. Do not buy anything unless you know what it is. Ask your financial advisor to explain any proposed investment in terms that you can understand. If you do not understand what is being peddled, don’t invest in it.
I have had more than one client shocked to learn after a spouse’s death, that guaranteed death benefits in excess of their investment in an annuity were 100% taxable as ordinary income, rather than 100% income tax free like life insurance. They were told by the annuity peddler that these annuity death benefits were just like life insurance.
7. There is no such thing as a free lunch. When it comes to investing, you do not get anything for nothing. At a recent social gathering, one attendee was touting how his financial advisor treats over one hundred of the advisor’s clients to a full meal on a regular basis. Who really is paying for the meals? The clients are, through fees and commissions paid to the financial advisor.
If it sounds too good to be true, it usually is, such as promises of returns much better than market averages. I recently saw annuities being marketed to seniors with advertised returns of more than 11%*. Watch out for those asterisks. In this particular case, it said in teeny tiny print down below “* includes interest and principal.”
With just a little due diligence, you can protect yourself and your investments.
By: Matthew M. Wallace, CPA, JD
Published edited June 7, 2015 in The Times Herald newspaper, Port Huron, Michigan as: Choosing your best financial adviser