How Can We Believe Everything We Read and See?
Should you be Skeptical of Some (Many) Financial Advisers? Yes you Should, and Here is Why.
Sometimes, you get an article across your desk that is so biased, you can’t pretend like it doesn’t exist. I read such an article earlier this week and I feel I owe it to the uninformed public seeking genuine financial advice to make a few comments about it. So today’s lesson is about how to become an informed consumer of financial products without getting a distorted view. I don’t know the financial advisor spotlighted in the article, nor do I know the reporter who wrote the article. For that matter, I didn’t know where Suwanee, GA was until last Thursday (I did Google that one). This is certainly not a personal attack but when people put themselves out there, well… then I can use this as a teaching moment. This type of financial advice happens every day in Anytown, America. This could easily happen to you.
I am a financial adviser. I do understand the industry and its faults. Overall, it is a pretty misunderstood industry when it comes to consumers. What concerns me in this article though, is a number of statements that are not quite what they seem to be. Reading this article, I got the impression there are tons of insurance salesmen just waiting to take care of you for free. And that is simply, not true.
To understand where I’m coming from, please see the original article first: http://suwaneemagazine.com/financial-fitness/ and then read my comments. Here it goes; let this be an educational opportunity. Keep reading, the last point is by far the best and most misleading.
#1: “Don’t wait to start planning for retirement when you are about to retire” Hill advises…. That is a very good point and is absolutely correct. By the time someone is about to retire, there is only that much which can be done. Retirement planning earlier in life is much more useful. I completely agree with the article so far. – Trust has been established.
#2: “Unfortunately, the employee turnover rate of Financial Advisors is among the highest of any service-based industry in the US”. Ok, this point needs some explanation. I, frankly, despise the term “financial advisor” because there is no official definition for it. Anyone can call themselves a financial advisor but the depth and coverage of some financial advice out there is debatable. So I would really like to see some facts included with this quote. What segment (sub-segment) of the financial service industry is included in this statement? I agree, if you look at the insurance industry (which the adviser represents), the turnover rate is enormous. This is because of the compensation structure of the industry: you eat what you kill. You work mostly (if not entirely) on commission and there are only so many 22 year olds who can sell enough whole life policies to survive. The insurance companies also tend to hire a lot (aka everything that moves and breathes) and when the selection process is not really that selective, turnover rates are high (I do place my graduating students so I see who gets hired where; I am fully aware of the hiring process at different types of financial companies).
I am having a really tough time getting any real turnover rates for different segments of the industry but if nothing else, from my personal experience of working with financial planning students and placing them in their first jobs, I can promise you that the turnover rate for independent RIAs and salaried (think of banks) financial advisors is much lower than what we see on the insurance side. -I’m becoming a little skeptical of this article now.
#3: “Hill has been recognized as one of the Top Long Term Care leaders for NY Life”. Well, that’s a nice statement, but what does that mean? How does this accomplishment translate into being a good financial advisor? How does this translate into being a comprehensive financial planner who takes care of your entire financial future? And if that’s not what you do then how do you know what’s best for me? Long term care is a very small area of a financial plan. A proven track record in Long Term Care (or life insurance or investments) does not necessarily mean that an advisor is good at everything. And from the way this article was written, I am also asking myself whether being a leader implies deep knowledge or top sales. – Now I feel like I’m being sold.
#4: “You might notice the multiple designations following his name, signifying the advanced degrees”. Let’s talk about those. My first observation is: where is the CFP®? This is the golden standard for financial planning. For being such an expert, why would you not become a CFP®? I won’t speculate about that because I simply don’t know. However, I did research the other 4 designations to figure out what they require.
- CLU® – Chartered Life Underwriter. This is an insurance designation and probably the best one to have. The designation provides advanced insurance knowledge. You go to a college (aka the American College in PA because they pretty much own the designation), you take a number of college classes and you get the designation. At the very minimum, you have to have at least 3 years in the industry to be designated a CLU®.
- ChFC® -called Chartered Financial Consultant. This is supposed to be an alternative to the CFP® designation but few people out there see it as such. As Investopedia puts it “The biggest difference is that it does not require candidates to pass a comprehensive board exam, as with the CFP®.”
- CASL® or Chartered Advisor for Senior Living. Provides training in the special needs, issues, and decisions facing senior citizens. Basically the same process for designation as the above. Requires 5 classes (15 semester hours)
- LUTCF® – Life Underwriter Training Council Fellow. Never heard about this one but it looks like it requires 3 eight week courses and again, is focused on insurance.
These designations took time, effort, and determination, however at the end of the day, this is no CFP®, with a third party, 6 hour comprehensive board certified exam. You also do need to be aware that the curriculum for these designations is very similar and if you go to the American College, you can kill many birds with one stone. After having all these designations, it would take little effort to have the educational requirement complete and be eligible to sit for the CFP® exam as well, so why not do it?
Additionally, there seems to be some implication in the article that passing the series exams (7 and 63) are huge accomplishments. Ok, let’s define what these really are. These are job requirements that salesmen need in order to sell specific products i.e. insurance, stocks, bonds etc. So if you can’t sell, you can’t do your job. Let’s not make them sound fancier than they are. They do require time and effort but, in my opinion, are not very difficult to obtain. – Now I’m really skeptical. I’m being duped with titles and trickery.
#5: “I don’t want to wake up in the middle of the night worrying about my client’s account because of a stock market crash”. Neither do I, but there is a direct relationship between risk and return. Making it sound like a conservative approach towards asset allocation is always appropriate is misleading. There are many risk vs. reward strategies available and everyone’s portfolio should be based on unique situation and goals. – Low risk, high reward? Apparently I was sleeping during my Ph.D. in Finance.
#6. Here is the major red flag (and the BIGGEST misrepresentation) is in the last paragraph: “Hill does not charge his clients a fee, a testament that his true motive is educating them”. This is simply not true. On the surface he may not be charging them a fee, but whatever product they are getting is certainly not for free. As a New York life agent, he is getting paid based on what he sells (in various forms of commissions for insurance, long term care, investments etc.). The devil is always in the details, and nothing is ever for free. – Now I realize the severity of the situation. The trust is gone and it’s not because I don’t like free things.
After reading this article, here are a final few questions I would really like answered as a consumer, and frankly, so should you:
- Can you explain exactly how you earn a living, because the article is implying that you work for free?
- Are you a fiduciary, in other words, would you always do what is in the consumer’s best interest, and are you willing to put that in writing?
- Would your firm’s compliance department be willing to sign the same document?
- Finally, if you are representing yourself as fee-free financial advisor (who came up with that term by the way?), how do you personally pay for all those carefully planned vacations mentioned in the article?
I want to emphasize again that I am not trying to attack or discredit this specific adviser. He is just a representative of an industry that sells products to consumers. I want to be very specific here, there is nothing wrong with insurance and securities sales, as long as you understand what you are paying for and what you are getting in return. Usually when I want a specific product, I call a specialist. If I need insurance, I call an insurance salesman, but if I need financial planning, I would call a Certified Financial Planner™.
With that being said, it is not honest to claim that consumers will not be charged fees for services. Consumers beware, you are being charged plenty and you might not see it in a transparent way. If you have no idea how much you are paying right now for your investments, let me know. I will run the numbers for you and hopefully, you will become a more informed consumer. And let me say it again, if you are looking for financial advice, please find fiduciaries who actually work in your best interest rather than in the interest of the company whose products they sell.