Recently, I read Alex Padalka’s article in Financial Advisor IQ, “Top IBDs Rake It in From Revenue-Sharing,” which made me realize how lost the average investor must feel. Most average investors don’t trust the financial services industry to do what is right. That’s because the world of so-called advisors is filled with people who have a vested interest in commission-based products and services.
The article talks about IBDs, an acronym for Independent Broker-Dealers but is never defined, making money from revenue-sharing commissions, which also aren’t explained. It measures the high fees of the guilty parties in basis points, but provides little sense of scale for readers to figure out what such an abstract measurement means to them. Even the assets these firms profit from aren’t explained to readers – you are left on your own to figure out what a non-traded REIT, BDC, or direct-participation program is.
Helpfully, the article does name some of the perpetrators of these ill-explained money-making schemes: LPL Financial, Cetera Financial Group, Commonwealth Financial Network, Ameriprise Financial Services, and Cambridge Investment Research. But what about everybody else?
Toward the end, the article warns:
Because of the inherent conflict of interest in such arrangements [revenue-sharing commissions] and lack of adequate disclosure, the SEC has mentioned the possibility of outlawing the practice outright.
But the article makes it clear that whatever this practice is, it is difficult or impossible to legislate away.
What will protect you from financial services companies and professionals that are trying to take advantage of you?
And more importantly: where can you turn to find trustworthy objective advice?
You might think that your own research will help decide which investments are advantageous and which you should avoid. Think again.
Michael F. Kay wrote a nice article on Forbes.com entitled “You’ve Got Those White Paper Blues.” He wrote:
Don’t look now, but your Inbox is flooding with another round of financial and economic white papers.
Each one—heralded as THE word on the hot topic of the day—claims its stake as the definitive position on the matter at hand. Here’s the rub: most of them are just slick, paid-for back up for the conclusions the issuer wants you to reach. It’s easy to get caught up in the words on the page presenting fact after fact, sounding oh so logical and real.
Here’s how it works: Company A, selling product B, goes to a writer and says, “Create a white paper that backs up these conclusions.” The writer (in search of a living after all) takes the job and begins data mining for information that supports the conclusion.
Just because you don’t think you are working with a commission-based agent or broker doesn’t mean that the products you are purchasing, broker you are using, or investments that you are using are the best available.
For this reason, we believe in the fee-only model of financial planning. Not fee-based, which sounds “free” but isn’t. A fee-only fiduciary sits on your side of the table and doesn’t get paid by the products that he or she recommends.
Here are six ideas to make sure that you aren’t getting ripped off:
- Look up your prospective investment advisor or broker’s information on the SEC’s website to see if they take commissions.
- Ask your prospective investment advisor to sign a fiduciary oath. You deserve a fiduciary standard of care. Here is The National Association of Personal Financial Advisors’ fiduciary oath. If your prospective advisor won’t sign, then don’t work with them.
- Ask your prospective investment advisor these ten questions. Here is an example of what happens when people fail to ask these questions.
- Make sure that all of your investments follow these same ten guidelines to safeguarding your money. You can invest in terrible things even if you don’t work with a commission-based advisor.
- Follow our Marotta Gone Fishing Portfolios.
- Find a fee-only financial planner who does comprehensive wealth management (not just investments). Delegate to them the task of understanding how other financial professionals and financial products make money. And then use your time to do what you are called to do and what provides the best return on your time and effort.
We think you need to either take the time and effort to learn to do it yourself or find someone whose advice you can trust and delegate the task to them.
Photo used here under Flickr Creative Commons.