Financial Dracula Wants Your Money

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It’s well known that for vampires to exist, they must drink the blood from someone or something else.

What if I told you the same was true for the financial industry, and for you to survive your retirement, you need to make sure you don’t get bitten? It’s true. The narrative driving the financial industry is fueled by fear and doubt to steer you toward investing and saving in a manner that provides revenue to the advisors.

It is not in their best interest for you to spend your money because that means they make less money on your money. Your money is their lifeblood. Once you understand this reality, it will help illuminate the many marketing tactics the financial industry uses to act in its favor rather than yours.

In my experience, I have identified two main offenders operating with this Count Dracula mentality within the financial industry:

1. “Fee Only” Advisors

2. “Never Lose” Insurance Salespeople

Unfortunately, listening to these marketing gimmicks can severely compromise your ability to enjoy your money confidently in retirement. Specifically, it is critical to avoid the two most dangerous words in finance: only and never

I’ll explain how the civil war between the “fee only” advisors and “never lose” salespeople is both confusing and harmful. But first, it’s important to establish the difference between the fiduciary and suitability standards, as well as the various compensation structures within the financial industry. 

Simply put, advisors operating within the fiduciary standard have a legal responsibility to put your needs ahead of their own. There are a number of important distinctions that separate advisors who have fiduciary responsibilities from those who don’t, otherwise known as the suitability standard. Note: Phibbs Financial operates within the fiduciary standard at all times. 

Fiduciary Responsibility 

  • Investment recommendations must be in the best interest of the client. Investment Advisors have a legal obligation to act in a moral and ethical manner. 
  • Pertains to Registered Investment Advisors (RIA). 
  • 100% transparency (commission, compensation, and fees).
  • Required to disclose any conflicts of interest. 

Suitability Standard 

  • Broker’s duty is to the broker-dealer they work for, not necessarily the client served. 
  • Not required to disclose fees or conflicts of interest to you. 
  • Insurance agents and Registered Representatives of broker-dealers (captive advisors, i.e. working for one company). 
  • Defined as making recommendations that are appropriate for the client. 

How Are Advisors Paid?

There are three main compensation structures for financial advisors:

1. Commission-Based

2. Fee-Only

3. Fee-Based

Commission-Based: Technically advisors and brokers can earn a commission trading securities (stocks, bonds, etc.). These commissions, also referred to as a stock trading fee, are charged when you buy or sell positions in an account.

This type of fee is paid directly by you, literally skimmed right off the top of your investment, typically. That being said, this type of fee structure is rapidly dying within the industry as most advisors shift toward commission-free trading. 

So, for this conversation, when referring to commission based, I’m specifically referring to the “never lose” insurance salespeople. 

And the truth is these salespeople aren’t advisors because they can only offer insurance. They are insurance salespeople, and when you only have a hammer, everything starts to look like a nail. These salespeople are held to the suitability standard, although that might be changing with future industry regulations as it pertains to rollovers from market-based investments into insurance.  

Insurance commissions are paid by the insurance company. When you purchase life insurance or an annuity, it’s not like real estate where the commission is paid by you. 

Fee-Only: These advisors do not receive any commissions. They are only compensated by the fee that you pay them. These fees are commonly levied on the assets the advisor is managing and deducted directly from the account. 

The theory behind this fee structure is it removes dangerous conflicts of interest, specifically commissions. This is a disingenuous marketing message, as it creates the impression that charging a fee does not introduce its own conflicts of interest. 

Again, when you only have a hammer, everything starts to look like a nail. If the advisor can only be compensated by charging a fee, there is a high likelihood all of their recommendations will have you investing in accounts associated with the fee. 

I’d encourage you to ask yourself: If these advisors don’t routinely recommend insurance because it has a commission (paid directly by the insurance company) can they really be a fiduciary? What if you needed insurance for your own individual situation? Would you trust them to make that recommendation to you?

Fee-Based: These advisors earn both fees and commissions. These are true fiduciaries because they can recommend and advise on whatever is in the best interest of the client without restriction. 

In my opinion, fees and commissions are one in the same. What I mean by that is it shouldn’t matter how an advisor is compensated as long as they are doing what is best for the client. 

Never lose” salespeople and “fee only” advisors have fundamental restrictions. This has the potential to cause serious harm for retirees. 

Fee-Only Advisors

The “Fee only” claim is primarily a marketing ploy to help distinguish advisors and attract clients. Nothing more. 

“Fee only” advisors often bash “high” commission insurance products, such as annuities or life insurance. This message is designed to manipulate you into thinking that any investment or product that features a commission for the advisor is inherently bad for you.  

Remember, unlike real estate or a mortgage broker, commissions on insurance are paid directly by the insurance company. You pay nothing. 

This mindset from these advisors is likely a product of the training they received when they started in the industry. Major brokerage houses spend an unconscionable amount of money creating this narrative, and it influences both clients and the advisors that parrot that message. 

Additionally, if these advisors received training primarily from a brokerage house, everything they learned likely centered on market-based investments. They simply didn’t learn the intricacies of insurance.

“Never Lose” Salespeople

The marketing tactic insurance salespeople use is that they can help you never lose money while still enjoying the gains. These use this message to frighten retirees into thinking they shouldn’t have any money invested in the market. 

Essentially, they are referring to an annuity. While we are strong believers in incorporating an annuity in your retirement plan, these products are sold and explained incorrectly far too frequently. 

This is because the barrier to sell insurance is far too low. You could literally study/memorize material for 72 hours, pass an insurance exam, and then start offering insurance the next day without any training or knowledge about the product you are recommending. That is an entirely different issue in itself. 

The problem with insurance salespeople is they look like an advisor. Many of them likely portray to be one behind closed doors. And unfortunately, how would the average client know the difference? 

And when working with these salespeople, all of your money is going to start being allocated toward insurance products, specifically annuities and life insurance. 

This is extremely bad for retirees. 

Conclusion

Trust is the foundation for any relationship, specifically when hiring an advisor. Anything that can hinder or prevent the quality of recommendations an advisor can make for clients is not only damaging to that specific client but to the entire financial industry. 

There is potential conflict of interest with every single compensation structure. Preaching or pretending otherwise should be a major red flag. 

Therefore, when you are considering hiring an advisor, I would recommend asking the following four questions beforehand:

1. Is the advisor a fiduciary? Fiduciaries are required by law to provide you with Form ADV 2A before conducting business with you. 

2. Is the advisor independent? This means they do not work for a broker-dealer or any one specific company (captive). If advisors work for one company, they will likely be held to sales quotas to maintain their employment. And when an advisor’s job literally depends on them “selling” that company’s offerings, there is a strong possibility those products and investments will wind up in your portfolio every time. 

3. Does the advisor have experience and knowledge about market-based investments and insurance? A retirement-focused advisor should be able to advise you on all aspects of your financial life without limitation.  

4. Is the advisor transparent about fees and commissions? How much will they make on your money? The advisor should explain how they are compensated before you ever invest money with them. 

MONEY IS MEANT TO BE ENJOYED

Ask us how we can help you worry less, spend more, and pay fewer taxes in retirement. 

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