(Very interesting. Did he leave you with a prospectus or give you any more information other than what’s written on your pad? It’s impossible to understand what he’s talking about from your notes.)
“I also met with this very nice young woman from the company that advertises on the radio about buying bonds. See, she wrote down about these municipal bonds that pay a very good interest rate. Don’t you think this makes sense?”
(Well, according to your tax return, you basically pay no taxes, so I am not quite sure why a tax-free bond makes sense. Also, these are long-term bonds, which can be very volatile when interest rates rise.)
“I really don’t know. But, shouldn’t I be getting the highest interest rate I can get to supplement my income?”
(I completely understand what you are saying, but it’s more complicated than that. For example, if you buy long-term bonds, are you comfortable with the fact that their market value will drop as rates rise and that they will not keep pace with inflation? There are a lot of factors to consider when creating the right investment plan.)
“I don’t know what’s so complicated. You’re a financial advisor, they’re financial advisors. In fact, one of them specializes in helping seniors. Neither of them seemed to worry about these other things you’re talking about. They just wanted to help me get more money.”
Herein lies the heart of the problem. When you mix people who are essentially financially illiterate with financial service companies who intentionally cloud the facts, the expected outcome is a disaster waiting to happen. In a world where everyone is a “financial advisor”, or where a CFP(TM) can sell products or be a fee-only advisor, the public can become the victim. Joe Q. Public hasn’t been introduced to the difference between a broker (who has Financial Advisor on their business cards) and a Fee-only Financial Planner. It’s all the same to the average consumer.
Star-studded commercials extoll the deep trust, faith and commitment of brokerage firm X to the interests of clients. Yet nowhere is it said that these brokers (commission-paid or fee-based) live by a less rigorous standard of care than those who adhere to the Fiduciary Standard—which requires that they act in the best interest of their clients.
When consumers don’t know the difference, they have no way to judge what is in their best interest. So here are a few tips to help make good decisions:
- Ask how they get paid. Is it commission, fee-based or fee only? If it’s not fee-only, regardless of the title on their business card or professional designation, they are not operating under the Fiduciary Standard. Their standard instead is something called “suitability” and it is less rigorous with less responsibility to the client. I am not saying those who are not fee-only are disreputable or dishonest. I am saying that they operate on different rules and have potential conflicts of interest that might not be disclosed. Fee-only advisors must disclose any conflicts of interest (and will present you with a copy of their ADV Part 2).
- Do they ask you a lot of questions and try and understand not only your financial picture, but your money history, knowledge and experience? If not, you should wonder how they can make recommendations without fully understanding your situation.
- Is there an emphasis on the solution before appropriate time has been given to consider possibilities? It seems to me that everyone’s financial life is different and it takes time to consider what is appropriate for each circumstance. If the solution is set and ready when someone walks in the door, consider running in the opposite direction.
- Do your research. Look up the advisor’s history on Google, on the FINRA website, etc. Don’t rely on glossy brochures and media to provide confidence in their ability to meet your specific needs.
- If you are presented with “limited time offers” be VERY suspicious. Who benefits most from your signing on the bottom line?
Your financial life can be challenging enough without having to tip toe through the financial minefield of products and services that you do not understand. Make sure you ask questions and never feel pressured to say yes if you are not fully on board and knowledgeable enough to make a good decision. After all, it’s YOUR money.