2655: When it Comes to Financial Advice, Follow the Money by Erik Carter of Financial Finesse

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[00:01:10] This is Optimal Finance Daily, Episode 2655. When it comes to financial advice, follow

[00:01:16] the money by Eric Carter of FinancialFinesse.com. And on your host and personal finance enthusiast,

[00:01:23] Diana Mariam, we're going to get right to today's post and start optimizing your life.

[00:01:33] When it comes to financial advice, follow the money by Eric Carter of FinancialFinesse.com.

[00:01:40] As the election year begins, there's a lot of concern about money and politics and how

[00:01:45] it can be used to corrupt politicians and buy votes. But politics isn't the only profession

[00:01:52] in which money can be a problem. The same can be said for financial planning too.

[00:01:58] I remember when I first started my financial career. I chose to work at an investment firm

[00:02:03] that had a reputation for integrity among the large, full-service brokerages. While I never

[00:02:09] experienced the company trying to dump poor investments onto clients out of their inventory

[00:02:15] and they didn't have proprietary funds to push, I did notice that they focused exclusively

[00:02:21] on only seven preferred mutual fund families. We only met with representatives from those

[00:02:27] fund companies and got rewards based on how much of those funds were sold.

[00:02:33] Selling a fund outside of the preferred families was frowned upon even if it was arguably

[00:02:38] more suitable to clients' needs. It's not that the brokers I met there weren't honest,

[00:02:44] but they generally didn't have a financial background before coming to the firm and learned

[00:02:49] most of what they knew from training that was centered around how to sell those particular

[00:02:54] funds. For that reason, they may have believed they were doing the right thing based on what

[00:03:00] they knew. Several years later after I left, the company was sued and had to pay $75 million

[00:03:08] for not adequately disclosing the fact that they were receiving extra financial incentives

[00:03:13] from those funds to sell them to clients. As I became increasingly uncomfortable with this

[00:03:19] arrangement, I decided to leave the firm and join an independent brokerage firm that was

[00:03:24] selling investments through several credit unions. The nice thing is that we were no longer

[00:03:29] steered toward any particular company so I could try to find the best deal for my clients.

[00:03:35] However, there was still a conflict of interest and that I wasn't paid for recommending

[00:03:40] a product that I couldn't sell like a no-load mutual fund. Since we were only compensated

[00:03:47] by commission, if I didn't sell, I didn't eat. Fortunately, I found several investment

[00:03:53] vehicles that I could sell with good conscience because I felt that they were worth the additional

[00:03:58] cost. But after a few years, they were closed to new investors. When I couldn't find adequate

[00:04:04] replacements, I decided to leave the commissioned brokerage world altogether and join a discount

[00:04:10] brokerage. There were several advantages of working at the discount firm. First, we

[00:04:16] were paid a salary so I didn't have to worry about having to sell products to pay the rent.

[00:04:21] In fact, we didn't sell products at all. Instead, our bonus was paid on the revenue the company

[00:04:27] made on our book of business, which was largely a factor of how much assets we had and how

[00:04:33] many of our clients were paying a fee for advice of questionable value. While we weren't

[00:04:39] incentivized to push certain products, it was still tough to be an objective and unbiased

[00:04:44] financial planner. You can make a lot more money by convincing wealthy people to move money

[00:04:50] from other brokerage accounts and sign up for one of our advice services than you could

[00:04:55] by helping people budget and plan for retirement. In fact, telling a client to pay off debt

[00:05:02] or put money in a 529 plan, or even their 401k could actually cost you money. My final

[00:05:09] stop before coming to financial finesse was at an independent fee-only registered investment

[00:05:15] advisor firm. Unlike my previous employers, the company had a fiduciary responsibility

[00:05:21] to act in the best interest of their clients. However, we were still compensated by gathering

[00:05:28] assets because the firm's fee was a percentage of the assets under management. This presented

[00:05:35] the same conflicts of interest regarding sales versus financial planning. In addition, since

[00:05:41] we only worked with people who had a minimum amount of assets, many of the people who most

[00:05:46] needed our help didn't qualify for it. So how can you find a financial planner that doesn't

[00:05:52] have these biases? First, see if your employer offers financial planning or education as

[00:05:58] an employee benefit. If the planner is paid a straight salary like at Financial Phinesse

[00:06:03] and doesn't represent a financial services company, you can get the best of both worlds, unbiased

[00:06:10] education and guidance for no cost at all. If you don't have this benefit and are just

[00:06:15] looking for some basic investment recommendations, you might be able to get some free advice

[00:06:20] from a discount brokerage. Just be aware that you'll have to pay a fee for more comprehensive

[00:06:26] financial planning. In that case, your best bet would probably be an independent financial

[00:06:31] advisor who charges either an annual retainer or an hourly fee. Keep in mind that objectivity

[00:06:39] is one of the many qualities to look for in a financial planner. The planner's education,

[00:06:45] experience, ethical standards, areas of expertise, personality and accessibility are some of the

[00:06:51] other criteria to consider. One way to screen for the first three is to look for planners

[00:06:57] with the CFP credential, the most recognized designation in financial planning. You can

[00:07:04] search for local CFP professionals at Let'sBakeAplan.org. It's a good idea to interview at least

[00:07:11] three prospects to see which is the best fit for your needs and personality. Of course,

[00:07:16] don't forget to ask how the planner is compensated. Some planners may not see anything wrong

[00:07:22] with potential conflicts of interest, but as opt-ins in Clare once said, it's difficult

[00:07:28] to get a man to understand something when his salary depends upon his not understanding

[00:07:34] it.

[00:07:38] You just listen to the post titled When It Comes To Financial Advice, Follow The Money

[00:07:44] by Eric Carter of FinancialFitness.com

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[00:09:29] Eric said a very important phrase in this article, conflict of interest. When you work

[00:09:36] with an advisor that only gets paid if you follow their advice, unfortunately, they have

[00:09:41] a conflict of interest. This is the main issue that I have with most of the 700,000 people

[00:09:49] who call themselves financial advisors. The way they are compensated means that most

[00:09:54] of us will never have access to unconflicted financial advice. Either they're making a commission

[00:10:00] on a financial or insurance product, or they're charging you AUM or assets under management

[00:10:07] fees, which is a percentage of your portfolio. While they might tell you that they are a fiduciary,

[00:10:13] if you really think about it, the fiduciary standard pretty much doesn't exist due

[00:10:18] to these conflicts of interest. I don't think all financial planners are awful and I will

[00:10:24] likely use one at some point, but I will only work with a flat fee advisor. Not fee-only,

[00:10:33] not fee-based, flat fee. I want to pay them for their time, just like my CPA or my attorney.

[00:10:42] Could you imagine getting your car fixed and the mechanic charged you a percentage of what

[00:10:46] your car is worth? Doesn't that sound insane? And yet most people don't blink an eye over

[00:10:53] AUM fees. The worst part about paying someone a 1 or 2% AUM fee is that most of the time

[00:11:01] you aren't even getting comprehensive financial planning. You've essentially hired an investment

[00:11:07] picker for the accounts outside of your employer-sponsored retirement plan. If you want to dive deeper

[00:11:13] into this infuriating topic, check out the video titled, Are Fire and Financial Advisors

[00:11:20] Incompatible on the Economy Conference YouTube channel. And if you're looking for a flat

[00:11:26] fee advisor, check out the website HelloNectarean.com. And that will do it for today in another

[00:11:33] installment of Optimal Finance Daily. Have a happy Thursday. Thank you for being here

[00:11:38] every day in listening and I'll see you on the Friday show tomorrow where Optimal