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Financnial Planners Do Not Always Act in Your Best Interest

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I will start this by stating there are some great financial planners out there. But there are also those who pay more attention to their interests than yours. And you know what? There aren’t always laws that require them to act in your best interest. Let me give you two personal examples of times when brokers acted in their interest when advising me on investments.

Example 1: Advisor Recommends High Commission Funds

Financial planners do nothave to act in your best interest!

He doesn’t have to act in your best interests.

When I joined the military in 1999 and had my first steady paycheck, I knew I wanted to invest. I just didn’t know anything about it. I had heard of an IRA, mutual funds, front loads, back loads, etc., but that was the extent of my knowledge. I talked with some of my friends and coworkers; however, few were investing at the time. This was also before the military had the TSP (Thrift Savings Plan, Government version of a 401k) as an option.

I went to a financial planner my friend recommended, and the advisor had me fill out a questionnaire that included my income, what I wanted to save for, future goals, etc. So far so good. In fact, he was very nice and helpful. When we went over my list, he recommended I open a Roth IRA, and he helped me fill out the paperwork to convert my Traditional IRA to a Roth IRA to the fund I was purchasing through him. (I didn’t have any tax implications because I hadn’t yet filed taxes for that year, and my income was below the Roth IRA limit.)

So what was my problem with the ordeal? Well, I signed up for a mutual fund through him, which was a large cap fund through Fidelity. I had heard of Fidelity and knew of their great reputation, so that was cool. I also knew fees would be involved because you can’t invest entirely for free. Not even through index funds.

What I didn’t know was how expensive investing could be. I paid a $1,000 front load to agree to a 15 year investment plan to purchase the Fidelity fund (I could get out of the plan at any time without any fees, but the $1,000 was non-refundable). He sold me on the idea of a front load by telling me to think about the $1,000 being extended over 15 years, so it was not a big deal.

It wasn’t until I learned much more about investing that I learned I was taken advantage of. I didn’t pay that $1,000 to Fidelity; I paid it to him. I also still had to pay the normal fees to Fidelity. After learning more about funds and investing, I realized I was paying over 1.6% annual fees for a fund that was more or less mimicking the S&P 500. So I transferred the entire fund to Vanguard’s S&P 500 Index fund where I paid 0.18% annual fees (the fund is currently at 0.17%). That’s almost 1/10th the fees for similar performance – and no load!

That was an expensive lesson that cost me a lot of money. Thankfully, I caught on before I caused myself too much long term damage.

Example 2: Advisor Expected me to Blindly Follow Advice

A few years after I moved my IRA to Vanguard, I decided I wanted to invest more money. This was in 2005, so it wasn’t very long ago. I had done some research and reading, was maxing out my Roth IRA, and had started a small allotment into the TSP. I went into a well known and respected brokerage firm (I will abstain from naming the firm because I believe my experience may be isolated to this particular broker, and I do not want to influence anyone’s decision to invest with this firm).

I set up a meeting with the broker and went over some of the same things as before – my earnings, current investments, future goals, etc. I told him I was maxing out my Roth IRA, investing in a tax deferred retirement plan, looking to diversify into a non-retirement investment, and I was seeking advice. (At this point I had progressed beyond just an S&P 500 index fund, but I still love index funds and their LOW fees!)

What was this broker’s advice? After listening to me talk for all of 5 minutes about my goals, how I was currently invested, how much I put away every month, etc., he pulled out a one page mini-prospectus (minus some key fund information) and told me this was his recommendation. “It was the best fund out there, it was great and would be the only thing I needed to own, yada-yada.” He also offered to have me transfer all of my other investments into a portfolio managed by him.

After approximately 1 minute he said, “So, it’s settled then. On your way out, why don’t you leave a voided check with my receptionist and we’ll set you up on an automatic monthly investment starting next week.”

He didn’t give me time to research the fund, think about how it met my goals, etc. It was a ‘one size fits all’ approach. No thanks!

I told him I would think about it and stood to leave. He handed me a stack of his business cards and asked me to hand them out to friends on base. (I’m sure he saw $$$$ signs everywhere!) Nope! I threw those cards in the trash as soon as I left!

I later looked up the fund and it had a 2.1% fee! That’s insane! Especially since it was basically a large cap index fund! I’m sure it also came equipped with a fat commission.

What I gained from this: A lot. I learned how to invest for myself. I researched investing. I read books, magazine articles, websites, etc. I talked to people with experience. But most importantly, I kept investing and continue to invest today.

With everything I learned, I steered many junior enlisted military members and good friends toward investing. I always made it a point to give them information and resources; I never told them how or where to invest their money. Many of them have thanked me for getting them started.

Yeah, it sucks that I gave away $1,000 for a BS load fee. In the end, I think it drove me to learn more about how investing works and how I need to do more learning and researching before jumping in. And if one person reads this post and doesn’t make the same mistakes I made, then I guess I’ve done some good :)

Be sure to research your brokers. Know your personal investment plan. And most importantly, understand how your investments work!


Published or updated March 28, 2013.
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{ 7 comments… read them below or add one }

1 vause

I am sure you have learned a lot about your investments. I am glad you are spreading the word out there. There are a lot of brokers who trick people and so I wanted to start a blog to show military members how easy starting a nest egg is!!

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2 Mrs. Micah

Good warning. For the financially illiterate, this must be much worse. You lost money at the beginning, but you know better now. If you didn’t, I expect this guy could’ve convinced you to buy his crazy fund.

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3 Ryan

Exactly… and he didn’t even give me the chance to read up on what his crazy little fund was! I suspect it came attached with an “invisible” 6% commission or something similar. ;)

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4 FourPillars

Interesting post – I doubt your experience was abnormal. The fact is that financial advisors are commissioned salespeople, not “investment professionals”.

Taking the initiative to learn on your own and take control of your own investments is the best thing you could have done. Helping other people do the same is a great service (which is one of the reasons I started my blog).

Mike

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5 Ryan

Hi Mike,

I agree, I don’t feel bad about my experience. Yes, I may have lost out on some money, but it forced me to learn more and do my research before investing. Helping others is a large reason I started my blog as well, and I think I have been able to do that.

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6 Roger @ The Chicago Financial Planner

Ryan great post and sadly your experience was not at all unusual based on what I have seen over the past 10+ years as a financial advisor. I normally don’t like to put links into a comment and feel free to delete, but I am a firm believer in the benefit of using a fee-only financial advisor. I am a member of NAPFA http://napfa.org/ and there is a find an advisor function on the site. Our members range from big firms with higher minimums to planners who focus on the middle market providing hourly, as needed advice. The Garret Planning Network http://www.garrettplanningnetwork.com/is another source of primarily hourly planners who are also fee-only. Many Garret members are also members of NAPFA.

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7 Ryan Guina

Thanks for the info, Roger, and no problem adding the links as they are value added and extend the conversation. The organizations you linked to are very helpful for finding a financial advisor. It’s always a good idea to do a background check or otherwise screen advisors before hiring them.

As for my example, I learned from it. Investing is one of those complex topics where sometimes you just have to jump in and learn as you go. Of course, you should always try to do your research first, but you shouldn’t try to become an expert before you invest, otherwise you probably won’t ever start! In this case, I was 20 years old, had just started my first full-time job, and I was living overseas in the UK (I served in the USAF). Even though I made a costly mistake, I’m glad I took the initiative to start investing.

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