Before you read further, you should know that I am often "that guy" on airplanes who strikes up a conversation with his neighbors to pass the time. Please do not hold it against me. Often times people pretend to sleep so they don't have to talk to me (I stopped taking it personally awhile ago), but every now and then I find a passenger who is willing to share more than a grunt or a dirty look. When that happens, the conversation can move in any number of directions, but given my background, often ends up with my new found friends telling me stories about their encounters with their financial advisors.
Two recent chats have been cemented in my brain as poignant examples of the unflattering lens through those who share my profession are viewed.
On a flight back from Florida, I sat next to "Ruth," a pleasant woman in her late 60s, and learned that she was retired and counting on her investment portfolio to provide her with cash flow to supplement her Social Security checks and pension benefits. She shared a concern with me that she did not think her retirement plan was built to last for her lifetime, and she worried that she might outlive her money.
I asked Ruth what her financial advisor thought of her question. She replied, "Oh, I cannot ask him about something like that. The only time I hear from him is when he wants to sell me something." Her matter-of-fact tone caught me off guard, but I managed to ask her why she worked with someone whom she could not fully trust with an issue so critical in her life. She stated, again in a straightforward manner, that her advisor was the son of a friend and she did not want to hurt any feelings or burn any bridges by consulting someone else.
A few weeks later, my neighbor on a different flight actually struck up a conversation with me (the nerve!). Coincidentally, "Ron" was also in the investment advisory business, and was employed by a large, nationally-recognized firm. I never told Ron that I was in the same line of work (quite frankly, he did not ask), so I starting peppering him with na´ve questions about the industry and how people in the field are compensated.
Ron told me how the majority of his compensation comes from exceeding new business goals and how little incentive there is to take care of clients once they are in the door. I remember one of his comments quite vividly; he told me that, "above anything else, I am a marketer of myself. Everything else takes a backseat to my sales efforts." I asked, given his philosophy and his firm's compensation structure, what happens to the clients he has already brought into the firm. He leaned over, as if he were letting me in on a secret, and said, "that is what assistants and junior associates are for."
Those two conversations have left a sour taste in my mouth. No wonder many people roll their eyes when they hear I am a financial advisor. It is likely because they have had similar experiences to Ruth or have been pitched by a slick salesman like Ron. If these instances represent a microcosm of people's experiences with financial advisors, we need to take a hard look at the industry and how its participants are compensated.
We are all still recovering from the wreckage of a period where Wall Street bankers' compensation incentives were clearly misaligned with their clients' best interests and largely contributed to the depth and magnitude of the crisis. Financial planning does not pack the omnipresent punch that banking does, but a financial advisor is entrusted with charting a path for each family with whom she works. That is an immense responsibility.
A good planner will provide unbiased, holistic advice that can bring life-altering consequences to a family. On the other hand, receiving subpar advice (or no advice at all) may cause someone to have to work longer than desired or borrow more than what could have been necessary to finance a child's education.
It is time to confront the notion that the current method of compensating a large percentage of advisors is preventing the Ruths of the world from maximizing their financial potential. Yes, we live in a capitalist society, and a financial advisor should be fairly compensated for her work and expertise, but when advisors' incentives conflict with their clients' goals, it often leads to unknowing clients being taken advantage of.
Compensating advisors exclusively or primarily through new business targets, commissions, and quotas is simply the wrong way to do business. While no compensation structure can eradicate all disingenuous financial advisors, often times either a flat fee or a fee based solely on assets under management can ensure that your advisor sits on the same side of the table that you do.
If any part of my conversations with Ruth or Ron rang true to you, and even if they seem foreign, I suggest you ask yourself the following questions:
• Do you really know how your advisor is compensated? If not, ask her. You are entitled to know if she receives commissions that are not easily uncovered each time she buys a new investment.
• Is your investment portfolio laden with funds from the same company?
• Do you feel confident that your advisor always has your best interest in mind?
• Does your advisor proactively contact you, or do you have to call her with questions or to set up meetings? Similarly, do you feel like your advisor only calls you to sell something?
I pose these inquiries not to question your ability to discern between appropriate and inappropriate advice, but because it is supremely important to me that all people, regardless of their wallet size, receive objective guidance. You entrust your doctor with your physical health — would you feel comfortable going to a physician who needed to sell a certain amount of a drug each month, could not choose from all available medications, or was compensated only for gathering new patients? Your financial health can be just as important as your physical health.
At the end of the day, this is your life — you only get one chance to live it. There are no redos, and major financial decisions that are not fully thought out can have life-altering consequences for your family. You owe it to yourself to work with someone who has your best interest at the forefront of her mind.
It is my goal that, over time, I hear more and more from my plane neighbors that they are fully confident in the financial advice they are receiving, and that one day, compensating advisors through commissions and quotas goes the way of the dodo bird. Nothing would make me happier. Help me get there by taking a hard look at the advice you are receiving and whether you go to bed at night wondering if you could be getting something better.
Jarrett Solomon is a financial planner with Connecticut Wealth Management in Farmington. Reach him at firstname.lastname@example.org.