Why you get bad investment advice
- January 24, 2010
- 12 comments
- Posted in Latest Posts, Life Insurance
Sales commissions drive the “advice” you get from brokers and other financial advisers. They promote products that pay them the highest commissions, even when they know about better (and cheaper) ones. Case in point: a story in Investment News on the newest tax-deferred annuities. These investments are notoriously expensive for consumers (although you rarely know how much you’re paying), and manna from Heaven for advisers. They earn a commission of 6.5 percent or more on every annuity they sell, plus 1 percent a year as long as you keep it in force.
John Hancock just brought out a simpler annuity which costs a bit less and is supposedly easier to understand. But the commission is only 3 percent, plus 0.25 percent a year, so advisers aren’t selling it. They tell their clients that the lower-cost product isn’t very good–and how is the client to know otherwise? But among each other, advisers tell the truth.“We can deny it all we want, but sales are commission driven,” one of them told Investment News.
That’s why I brought this story to your attention. Consumers forget that advisers who earn commissions are not their friend. Advisers are nice, they’re cheerful, they might even be your brother-in-law, but they have to sell high-commission or high-fee products to keep their jobs and send their kids to school. And who do they sell them to? You.
Blog posts are not the place to go into detail about tax deferred annuities, complicated products that are overhyped and oversold. In my book, I spend a lot of time explaining them and offering alternatives. But book or no book, any time you’re offered hard-to-understand investments that (like these annuities) promise all gain no pain, blow them off. They will make your adviser rich but—believe me—they won’t make you rich.
The best way to protect yourself from commission-driven sales is to switch to a fee-only investment adviser. Fee-only advisers sell no products and take no commissions, they charge only for their advice. Two places to find them: The National Association of Personal Financial Advisors (napfa.org) and the GarrettPlanningNetwork.com.
Tags: sales commissions, tax deferred annuity
Jane- Thanks for the great advice, as usual. My wife and I challenged ourselves to have the hard conversations about budgets and have developed personal finance as a strength in our marriage, which was not the case for my parents. We developed our plan last year using your Smart and Simple Financial Strategies for Busy People last year. Accomplishments include paying off all credit cards, accounting for all assets, rebalancing our 401K portfolio (in time to ride the upswing in the stock market), developing a will, saving a 3 month emergency fund, and living within a monthly budget to focus on saving enough for annual vacations (which we love). We had the benefit of financial counselor offered through my work that could not sell us anything. It’s amazing what great advice you can get from skilled advisors who are only there to serve your financial interests. I’ve shared your book and our experience with our friends an other couples getting married at our church. I do have one question which I hope you’ll address at least partially in a future blog… 401K insurance. I’m already investing in disability to get 66% of income, if the need should arise. Of course, that doesn’t cover our retirement at all. Since I’m the breadwinner for our family, I thought it reasonable to purchase 401K insurance in that unlikely event. Of course, the actual value of this vs. simply investing the money depends on how much it costs. So, do you have any rules of thumb about the value of 401K insurance relative to costs? Thanks much… Warm regards, Peter
I have no rule of thumb. These are very new products, being offered through some businesses to members of their 401(k) plans. They guarantee a certain percentage increase in your 401(k) investment (say, 5 percent), even if the market falls below that level. To get the plan, you have to invest in certain, specified stock-and-bond funds. Whether the insurers can meet their guarantee will depend on the effectiveness of their market hedges (they have to hedge against the risk of having to pay on a lot of 401(k) plans all at once). In the market panic of 2008-09, those hedges didn’t work very well. Since then, a few insurers have lowered their guarantees on 401(k) insurance and raised their price. You generally pay between 1.5 to 2 percent a year, so you’re giving up some upside to protect your on the downside. New products need time for experimentation, so I don’t have a bottom line on 401(k) insurance yet, but I’m watching.
Thanks for many quality cols.
Here Here!
Many client have come to my office for objective “fee-only advice” but it is after they have been sold an annuity that they did not need nor did they understand, rather than before they signed on the dotted line.
When a senior citizen applies for a reverse mortgage they are required to consult with a objective advisor not affiliate with the lender or mortgage broker. That may be a good idea with the sale of investments as well.
Keep up “getting the word out”.
Thanks Mike
Jane, It is always a pleasure and a breath of fresh air to see people like you continuing to fight the good fight. I have enjoyed your books and have even referenced them in some of my seminars. You keep the advice simple to understand for the reader and simple to implement. Keep up the great work. God bless you. Michael Miller, CFP(R)
The industry has not made it very easy for consumers to know what kind of financial professional they are using. Names like “investment advisor,” “private wealth advisor”, or “financial consultant” are not used consistently to refer to either commission-based broker-dealers or fee-only registered investment advisors. Some professionals are both. Standardization of nomenclature and consumer education would create better informed consumers so they know how the professional is paid and can then view the advice they receive accordingly.
Jan Sackley
Fiduciary Foresight, LLC
Regulatory Risk Consultants
Twitter@jansackley
I heard you on KPCC today fighting the good fight. It’s a crime that the financial services industry is so used to taking advantage of, rather than taking care of clients. As American’s we’re so used to this kind of treatment, the broad majority of us believe it to be quite normal. Fortunately, the concept of the fiduciary advisor is coming to the fore, and as it does, more and more broker-advisor types will be forced out of the commission game because of the conflict of interest and bad outcomes it predicts for their clients.
Thanks Jane. As a fee-only planner myself, I have found the greatest abuses in these high commissioned life insurance products. Within the past year, I have counseled the highly paid single professional (with no dependents) who was being sold a high commissioned insurance product, the senior citizen who was being enticed to mortgage his paid off home and invest the money (this was right before the great recession), and the senior citizen who had an annuity that came with a prospectus that was so complicated it could have just as well been written in Arabic. Two of these I was able to provide with objective advice,and prevent them from making costly damaging mistakes; one was too late. Consumers need to be prepared to face these sales people parading as “financial advisers” A couple of questions can help…How much will you make if I buy this product?….Are you credentialed? (CFP(R), EA, CPA, JD)…and then lean in, look them directly in the eye and ask…if I buy this product who would benefit more, you or me?
What I want to know is what the “professional investment managers” are telling their retired customers to do about their retirement income? What is being said to retirees that hold these bonds? What will the federal gov do if these start to fail? Bail them out through inflation?
An excellent article and I loved the way that you stated without a moments hesitation that “They promote products that pay them the highest commissions, even when they know about better (and cheaper) ones.” I imagine that you used the non referenced, unattributed and possibly incorrect quote “We can deny it all we want, but sales are commission driven” to paint the broad stroke.
Keep up the great work Jane and work toward protecting the public from its greatest enemy, its own greed, stupidty and laziness.
Wow, great article…loads of sales lines from a true…commission earning sales person!! My personal favorite, “Consumers forget that advisers who earn commissions are not their friend.” Consumers forget that every time some sucker buys this journalist’s book she earns a commission! Oh, by the way I noticed that no one mentioned fee based planners can earn significantly more then a commission would pay while a client loses money(notice I didn’t use absulotes like “all fee based planners are scum”). As it turns out I can charge fees for planning…I can also charge commissions! I supposed I’m the devil. Yet I fully disclose all cost of every product, have recommended options where I make no money and work with both friends and family. But I suppose they really aren’t my friends or family…or better yet I’m the devil and I cheat even them.
I recently looked into buying foreclosed properties but did not succeed. Appreciate your thoughts on investing in them.