Brace yourself. Going to a financial adviser can be like talking to a used car salesman.
Some hustle you toward certain funds because they make more money that way.
It’s “legal larceny,” says Robert “Bobby” Monks, an entrepreneur and author of “Uninvested: How Wall Street Hijacks Your Money and How to Fight Back.”
Bad advice hurts. American families lose an estimated $17 billion a year because of the “salesman” financial advice, according to President Obama’s Council of Economic Advisers.
“The system is so weighed toward Wall Street. It’s a systematic structure to suck fees out of people,” Monks says. He thinks 1% to 1.5% in total fees for everything is about right, but he believes many advisers are get closer to 3% because people don’t check.
Obviously, you want to an adviser who won’t bleed you dry and is genuinely interested in helping you invest wisely so you have enough money for retirement or that dream vacation to Antarctica. How do you get that?
It’s your money. Protect it.
Your first question to any adviser should be: How do you get paid?
Financial advisers fall into two broad camps:
Advisers who get paid a flat fee no matter what recommendations they give you.
Advisers who get paid more money if they get you to invest in certain types of funds (typically stock funds) over others.
You want a flat-fee adviser, says Monks. It could make tens of thousands of dollars of difference.
Veteran financial adviser Michael Joyce agrees.
“We get the fee question all the time. It’s something that anyone who is a financial adviser should really expect to get early on,” says Joyce, president of JoycePayne Partners, an advisory firm with over $600 million under management. His firm was one of the first to go to a flat fee in the early 1990s.
The second question to ask a potential adviser
Here is your second question: Are you acting as a fiduciary?
“It’s like the ‘f-word,’ says Joyce. It’s a fancy way of saying, are you putting me first?
You want the adviser to answer “Yes.”
The fiduciary standard is a legal set of rules that binds an adviser to disclose any conflicts of interest upfront and give you the best advice.
It’s not perfect, but it means if something goes horribly wrong and your adviser has been misleading you, it’s a lot easier to take the person to court to try to get your money back.
Changing how Americans get financial advice
A new Obama administration rule requires all advisers giving advice on retirement accounts like 401(k)s and IRA (Individual Retirement Accounts) must operate by the fiduciary standard. The rule isn’t law yet. Congress has 60 days to vote it down and Republican House Speaker Paul Ryan has made it clear he’s not a fan of it.
But here’s the takeaway from the debate over the Obama rule: at least a third of advisers operate under the fiduciary standard already, according to Mercer Bullard, a University of Mississippi law professor. They are people like Joyce who have chosen to do business that way.
Many others are “hybrid” advisers that can swing either way. They can wear their fiduciary hat or not. Make sure you know what kind of adviser you have.
Then there’s new apps
Another option is to manage your money with technology. New apps and online platforms like Betterment and Wealthfront show just how low fees can go. They manage money for a flat fee. Betterment charges 0.15% to 0.35%, depending on a person’s account size. Wealthfront charges 0.25%.
It’s not the same level of in-person service as a traditional adviser, but you get the basics for a very low flat-fee cost.
Betterment and Wealthfront offer computer generated advice that helps you choose low-cost index funds after you input criteria such as age, risk tolerance and your income.
Being smart with your money begins with knowing what kind of a financial adviser you want.