The Best Way To Develop Trust In A Financial Advisor
What is the best way to know if a financial advisor will act in your best interest? How can you develop trust?
By asking these two questions to the advisor:
How are you paid?
How much, in total advisory fees and investment costs, will I pay?
Here’s why: the financial services industry is notoriously profitable. In fact, in 1996, speaking to a roomful of financial advisors, the head of Merrill Lynch Wealth Management declared, “Money management is the most profitable business in the United States. And it is incumbent upon all of us not to louse up the situation for others who may follow.”
To be so profitable, the industry has always depended upon, and preyed upon, its clients’ ignorance of two things: how it makes its money, and how much money it makes.
So, ask those questions. The answers, and the tone with which they’re delivered, will tell you all you need to know about an advisor and his intentions.
If your advisor is paid by commissions or sales loads for selling you products or investments, he cannot act in your best interest. That’s because commissions and sales loads create conflicts of interest. They are in the advisor’s best interest, and therefore, not in yours.
If an advisor charges a percentage-based fee on the amount of your assets, that also creates clear conflicts of interest, one of which is the indefensibly high fees that too often result. We’ve got more to say about the grave problems with percentage-based fees HERE.
So, if you want to have trust in an advisor, you must know what’s in it for the advisor. Ask Question 1.
And ask Question 2, because total fees and costs, meaning, the total of the advisory fees plus the investment costs are hardly ever disclosed to clients. Guess why that is.
Brace yourself for Question 2's answer. The amounts in undisclosed fees and costs that clients pay year after year is nothing short of scandalous. And among the worst perpetrators of this scandal are the most “reputable” banks, brokerages, and insurance companies that spend billions on expensive advertisements that buy their reputations and attract new clients. Guess who pays for those advertisements.
Take heart, though. There are advisers out there who do business a more fully-disclosed, sensible, and fair way. They are paid reasonable fees for advice, not commissions or sales loads for selling products. And they charge based upon the complexity of the advice they give, rather than on how much money their clients have.
Eventually, we’ll all be doing business that way, because once they know the difference, clients will demand better. Just don’t expect the industry itself to drive that change.