My friend, Dan Martin, MBA, is a former financial advisor and award winning writer that now works in public relations at Jackson National Life. I promised Dan I would give him credit for inspiring me to put these thoughts together. We are convinced there are several things financial advisors want their clients to know, but won’t tell you. Here’s the YouTube version:
1) We Hate It When You Lose Money
Most of the financial advisors I know would prioritize their relationship with their clients second only to their relationships with their family. They feel awful when it comes time to explain to clients that an original investment took a loss. It is interesting to note that sometimes investors are upset when they think there was a loss, but must be reminded that the account may be down because income was taken. It wasn’t a market loss. When it comes to a loss, Martin found a great source, the Weizmann Institute of Science, located in Israel that studied the neuroscience of losing money, emotions, and evolution on June 12, 2012. They found that, “Mildly stressful situation can affect our perceptions in the same way as life-threatening ones.”
Apparently our brains often function in such a way that the fear of loss of money is no different than the fear of loss of life. Weizmann Institute scientists go on to say, “Financial loss can lead to irrational behavior. Loss can compromise our early perception and interfere with our grasp of the true situation.” Now that you know how our minds work and you know the conversation that financial advisors are anxious about having with you, let me offer you a couple of questions you can ask to help put everyone at ease. Start by asking your advisor, “What have you learned over the past 15 years?” Then ask, “The stock market had a tough time 2000-02 and again 2007-08, what did you learn that may help my account, in preparation for the next time stocks might hit new lows?” You want to be well prepared for the good, the bad, and the unforeseen.
2) We Don’t Want To Sell You Products
An advisor relationship isn’t for every investor. Clearly the funds have to be placed in some type of investment vehicles. Look closely to see if the recommendations are based on commissions paid. Investors like it when the advisor has skin in the game. Instead of recommending commission based investment vehicles, increasing numbers of advisors earn a flat fee for the assets under management. Some investors understand that to mean they are paying 1% per year. That may be the fee that the advisor earns annually, which will rise and fall with the account, so the advisor participates in the gains and losses, but make sure you look at the total costs of each investment vehicle. Personalfund.com, for example, notes that 70% of owning a mutual fund is the cost of the transaction fees. The transaction fees are not reflected in the prospectus. Given the vast array of mutual funds, this source determined that the average cost of owning any mutual fund before the broker earns any money is 2.40%/year. Now if you add in the 1% paid to the broker the total annual fee may be 3.40% or more. As you know, sometimes you pay less and you get less. But you should always know exactly what you are paying for, then you can determine if the price is warranted by the value received. The investor must reveal their expectations, just as the patient must describe their symptoms, or the doctor cannot prescribe, much less cure.
Make sure your advisor knows that you want a real financial advisor, not a salesman. Advisors bristle we are called “glorified sales people” so before throwing your money on anything, begin with the end in mind. Ask for help if needed in determining your goal if you have yet to retire. If you have retired, make sure you see what has to happen for you to keep work optional. Review your assumptions and accounts no less than annually. Identify risks you are willing to take and risks you are determined to avoid. Major universities and endowments may own 6-8 different investment vehicles, while average investors may own 3 different types of investments. We will all agree that an investment platform that includes 6-8 legs is more substantial than having 3 legs or less. Discover how you might diversify unlike you ever have before.
3) The More You Learn On Your Own, The More Value They Can Add
As Forbes noted, what success looks like to a high-net worth investor, “What is most gratifying to me is that I now know enough so I avoid being the center of a feeding frenzy of salesman.” Make sure the advisor prepares specific goals for your wealth before any documents are signed. Just as the health industry is becoming more patient-centered with health experts comprising a team of professionals who all have their eyes and their talents focused on each patient, the financial services industry is beginning to take the same prescription. The health model may include a physician, dietitian, nurse, physical therapist, physical trainer, massage therapist, along with a mental health professional. The wealth model will include the accountant, realtor, estate planning attorney, life insurance professional, and financial advisor. One of the best ways for investors to realize their goals is to secure the advice of professionals that is free of conflicts of interest. Now, if it is the case that you don’t understand or don’t like the answers you get to your questions about your money, let me suggest that you get a second opinion.
John L. Grace>Securities licensed associates at Investors Advantage are Registered Representatives & Investment Adviser Representatives. Securities and investment advisory services offered through NATIONAL PLANNING CORP. (NPC), NPC of America in FL & NY, Member FINRA/SIPC, and a Registered Investment Adviser. Investors Advantage and NPC are separate and unrelated companies. The opinions voiced in this article are for generational information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Past performance does not guarantee future results. Neither diversification nor active management strategies can guarantee a profit or protect against a loss.