Why the Financial Services Industry Has Failed-AGAIN!

Back in the day, as my kids put it when they imagine the world 30 years ago, you didn’t have a lot of choices when it came to having someone manage your finances. You contacted a stockbroker, ponied up the commission costs and boom—you owned stocks or bonds. When you wanted to sell, you called your broker, and he (female brokers were rare) got another commission for that transaction.

As with most things, hiring a financial advisor is way more complicated today. I’m a Certified Financial Planner (CFP), but even I find it kind of overwhelming when I look at the alphabet soup of designations that are meant, in a perfect world, to demonstrate an advisor’s competence.

The Financial Industry Regulatory Authority (FINRA) has compiled a list of these professional designations, and there are more than 200. Accredited Estate Planner (AEP), Accredited Financial Analyst (AFP) Chartered Financial Consultant(CFC) Accredited Portfolio Management Advisor (APMA), and on and on.

In most cases, these designations show little more than the ability to pass a test and pay a fee. But what’s way more important is whether the advisor is motivated to do what is in your best interests.

Part of the motivation is supposed to come from the way he or she is compensated.

Besides having those who still sell on commission, we now have financial advisors who sell products on a fee-basis or a combination of fees for products and commissions for transactions.

These days, though, fees are getting compressed as financial services firms compete with online investing. Moreover, thanks to the very public financial misdeeds of some of our largest institutions, we’re seeing continued criticism of both fee and commission-based incentives.

The money management industry has made an attempt to solve these problems with an increase in registered investment advisors (RIAs) that charge based on your portfolio size—the assets under management (AUM) model.

Even so, clients are complaining that they aren’t getting enough value from the AUM-based model, and the trend we’re likely to see in the future is fees based on portfolio performance or fee by service, unbundled from the whole.

To all of this I say: whatever the designation and the compensation structure, it’s mostly all the same scenario. Someone will take your money, manage it, charge you and perhaps even offer some planning services, but it’s the recurring paycheck that holds their interest.

While the compensation for a so-called “wealth manager” who charges based on AUM or performance might dip when the markets go down, it goes up when the markets rise and it’s certainly a way better payday than depending on selling hot stocks or sexy new instruments on a commission basis.

The financial services industry, led by the largest institutions (you know, the ones that have been embroiled in scandals over the years, paid settlements, and stayed in business) is leading the way to providing products without giving a hoot about what happens to the actual customers.

You don’t believe me? Take a look at all the political contributions and support coming from Wall Street and then look at how these institutions have been protected by politicians. It is disgraceful and only the consumer loses.

How do you find a financial advisor who does have your best interests at heart? Here is something to keep in mind: you need someone who will help you plan. That is, they’ll help you plan a financial strategy that fits your own unique life and goals, rather than just throw your money into investment products that help your advisor earn money.

Here are five points about planning to keep in mind:

  1. Planning informs how a portfolio should be constructed, not the other way around. (Before you read number 2, go back and re-read this again. It is key to understanding)
  2. Real planning does not occur by slapping some numbers through a computer program. It must start with an understanding of your values, your family, your money mindset and your expectations.
  3. Real planning takes time, consideration and the commitment to the client that encompasses success on broad terms. It’s conversation and exploration. It’s based on being able to challenge, question and develop scenarios that actually mean something.
  4. Real planning touches areas that are beyond your investment portfolio, such as risk management, estate planning, taxes, retirement, lifestyle, and life transitions. Real planning considers the threats that can impact your success.
  5. Real planning is ongoing, because, well, life changes, work changes, family dynamics change and your goals and situations change.

Your needs go far beyond asset allocation and which money manager is steering your ship. While many wealth managers might do a great job, at say, wealth management, if they’re not doing the real planning work, it’s hard to imagine that you are being properly served.

Is the AUM or performance model better or worse than the old method of selling on commission? I guess it depends. But I am convinced that the industry is still doing what it has always done: looking out for its own profits and interests.

Your wealth manager might talk a good game about serving your needs—but has he or she mapped out a plan for what you’ll actually need over the course of your lifetime?