Who Controls Your Financial Advisor?

 

By Jack Waymire

www.PaladinRegistry.com

 

How to tell if a financial advisor has your best interests—and not those of his employer—at heart.

 

 

As I’ve tried to show in this column, some financial advisors will tell you exactly, and only, what you want to hear. They’ll say that they’re planning and investment experts who put your financial interests first. They’ll suggest that they can produce exceptional investment returns with low risk. And they’ll make these claims in oral sales pitches, so you have no written record of them.

 

False claims can be damaging if they cause you to select the advisor with the best sales pitch rather than the best qualifications. But there is another looming risk when you select a financial advisor, and it involves what the advisor doesn’t tell you: His advice may be tainted by pressure from his employer or the firm that holds his licenses.

 

Here’s how this phenomenon works. As you probably know, there’s a lot of consolidation going on in the financial services industry. Big firms are gobbling up smaller firms at a fast pace for a couple of reasons:

 

1. The larger company wants to market their products to the smaller one’s current and future clientele.

 

2. The larger company wants a bigger sales force for their products.

 

Not only do these reasons not benefit investors, they can create risk. For example, banks have acquired broker/dealers that own Registered Investment Advisory firms. You decide to follow the advice of a financial professional who is registered with the advisory firm. However, you are not told the advisory firm is owned by a broker/dealer, which in turn is owned by a bank. You are also not told the advisor is required to market financial products sold by the bank and the bank’s broker/ dealer. You’re then putting your money into products because it helps the advisor and his employer first, and you second—if you’re lucky.

 

Insurance companies use similar tactics. They acquire broker/dealers and investment advisory firms to expand the sales of proprietary insurance products. Let’s say you’re working with a financial planner from an advisory firm who recommends annuities and life insurance. What you don’t know—because you don’t know who owns his firm—is that all of his recommendations are for products from the insurance company that owns your advisor’s company.

 

It costs companies a lot of money to support the sales and service activities of financial advisors. Consequently, the advisors are under a tremendous amount of pressure to sell proprietary products that make the companies the most money, even if the products are inferior to or have higher fees than products produced by third parties.

 

Another, more subtle version of the proprietary product game is the recommendation of blended solutions. That is, 50 percent of your assets will be invested in third-party products and 50 percent of your assets will be invested in proprietary products. It’s still not great—but the advisor has muddied the waters by emphasizing the value of diversification. You would be much better served if you had complete freedom of choice to select the best products.

Curator