Trust is hard to come by in the world of finance. And for good reason. People see movies like Boiler Room, Wolf of Wall Street, or The Big Short and see that there are many ways that brokers can scam investors out of their hard-earned cash.
Even barring major scandals, this happens frequently. You might recognize some of these stories:
- One small business owner takes a closer look at the variable life insurance policy that they’ve been sold. They realize that the fees they pay inside it, they are no longer building cash value within the policy. Each month, their account steadily loses value. Their agent failed to alert them about the fees, and the effect they would have on the cash value of the policy.
- Another investor examines their most recent statement. Despite the market making gains in the past year, the investor notices that their account hasn’t changed. Their broker had recommended a series of trades which led nowhere, and has been getting paid a commission with each transaction.
- A retiree has been sold a variable annuity, enticed by the potential for gains, while still having a guaranteed income. However, with inflation, their guaranteed payment has difficult covering their expenses. On top of that, they notice that despite being invested in the stock market, their annuity has not underperformed the market due to the high expense ratio of the annuity’s funds.
What do all of these have in common?
In each of these scenarios, the person who sold the policy was paid on commission.
Why is that so important?
Consider a puppy. I know, this seems like a left turn, but go with me here. Puppies behave exactly as they are trained to behave. Owners reward the puppies for doing certain behaviors, which leads them to do those things more often.
A common phrase amongst trainers: There are no bad dogs, just bad owners.
Photo by John Tuesday on Unsplash
People are surprisingly similar. We do what we’re trained to do, and when we are rewarded for certain behaviors, we want to do it more often.
Employers do this too when they pay salespeople a commission. They are incentivizing the salesperson to sell more of those products.
But what happens if the product is not actually the right fit for a customer? In the scenarios described above, those salespeople still got paid a commission.
They have found themselves in an environment where it paid to not have the client’s best interest at heart. And the trust that the clients gave them was betrayed.
Whenever you are getting financial advice, you’ll want to find out how the person gets paid. If they’re getting money from someone else, then who will they answer to?
A good example of that is a YouTube channel sponsored by a specific bank. Do you think that channel will say anything negative about the bank? Do you think it’s possible they’ll try to send more customers to the bank, so they can get more money?
Financial advisors are the same. If they are getting commissions from another company for selling insurance products, then they have a strong incentive to act in that company’s best interest, and not yours.
Who can you trust?
Do you trust your doctor, or your attorney? You probably do. Why? Because they are legally required to act in your best interest, and you have legal protections if they don’t.
There is one class of financial advisor that is legally required to put your interest before theirs: a fiduciary.
If you want financial advice you can trust, look for a fiduciary financial advisor. You’ll need to make sure they’re a Registered Investment Advisor (RIA). This means that their license requires them to deal with you as a fiduciary.
Importantly, you’ll want to also make sure that they are not getting paid to sell you products (like the salespeople above). If you find an RIA, ask them if they are dually registered. If they are, then they are legally allowed to avoid their fiduciary responsibility to you.
Also be sure to ask them how they make their money. If they start saying anything along the lines of “in certain situations another company might give us compensation,” you’ll know you’ve found a salesperson. You want someone who can confidently and unreservedly say “I get paid by you, and only you. I have no other conflicts of interest.”
Do these steps and you’ll have found an advisor who is legally responsible for providing financial advice and planning that you can trust.
Here at Plan & Act, we are true fiduciaries. We are Registered Investment Advisers, and the only income we make is through client subscriptions. We don’t sell any other products, whether proprietary or from other companies. In this case, we can approach give advice with no conflicts of interest.
We’d love to meet you and help rebuild some of the trust the financial industry has lost. Click here to register for a free Bronze account. With it, you’ll get access to a free meeting with a licensed advisor who can help you strategize for your next step.