Recent financial regulation reform, known as Dodd-Frank, has limited the ability of financial advisors to conceal elements of their compensation that are apparent conflicts of interest. With more transparency in this area, there will be a lot of jockeying to find new ways to “help” investors make decisions while influencing them to buy the “right products.” Here’s what you should know about getting financial advice today:
1. Advice can be used to manipulate you.
Financial advice is subsidized in our world today. It is often a loss leader, sometimes a bait and switch candidate. If you’re offered or receive advice as part of your engagement with a financial advisor and don’t get a bill for the time it took to prepare and present the advice, you’d better find out who paid the freight. It may be the advisor himself, using advice to establish trust with you to sell a product or service that you wouldn’t buy without that trust.
Subsidy may be provided by the entity that compensates your access to the advisor or leads you to the “tool” that dispenses the advice. Advisors (and tools) need to be housed or equipped and supported. Who does that? What does it cost? Investment brokerage firms, banks, insurance companies, real estate companies, even charities provide subsidy that uses advice to establish a trusting relationship on which to transact business.
2. Financial advice is NEVER FREE.
The Dodd-Frank bill will lead to regulations that may someday protect you from those who you thought were giving you free advice by identifying all compensation sources that surround the transaction. But until the Department of Labor, IRS and other regulators have done so, you’re on your own.
The next time you get advice, look very closely at how it is paid for. If you can’t figure it out, you are being hustled. If you ask and you get a vague answer, run. There are ways to get inexpensive advice. Look for a “spin free” advice environment and “bookmark” it. Examine the credentials of any person giving you advice. Who pays them and how? Ask them if they will work for you as a “fiduciary advisor”, i.e., will they provide advice that benefits no one but you.
3. Valuable advice must examine the pros and cons of doing nothing.
If the advice you receive is really objective and the advisor takes responsibility for your welfare only, he or she could actually advise against taking any action. This may confuse you, but it should feel like a bracing breath of fresh air. The advice to do nothing is often the wisest counsel. If “don’t do it” occurs to you as a nagging thought, get a second opinion. That gut feeling is acknowledgement that the full set of possible actions might include buy, sell and hold. And, as you might guess, you can make money and lose money taking each of these paths. Good advice will examine all three choices carefully.
4. Good advice by experts using Web and phone is now available, inexpensively.
Use the Web to find good advisors who will work with you. Read their credentials and find out how other online consumers feel about their service and professionalism. Ask for a proposal as to how they would help you solve a problem, including the fee they would charge.
Now that you know free financial advice may be suspect, you also know that as in everything else in life, you get what you pay for. Careful shopping will get you the best price.
Kevin Condon is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a flat fee. His firm, located in Boulder, Colorado, includes a portal through which expert, independent advisors give advice. Find advisors there for help on virtually any financial need.
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