Step 10 of 10 Personal Financial Planning Steps in the Right Direction
Pick financial advisers and investment advisers solely to obtain objective and high quality financial advice. Specific financial counsel and investment counsel is potentially of high quality, only if it is carefully customized to your particular needs and only if it is given by an adviser who is independent, knowledgeable, and competent. If you agree with the advice being given, then buy the recommended securities and other financial products through the most inexpensive channels possible.
This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner‘s personal financial planning and personal investment management process. For a summary of these ten steps, see Family Financial Planning. To find an in-depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below, and you can subscribe to Financial Planning Software. Please enjoy reading this article. Thank you!
Step 10 – Self-manage with occasional professional consulting
Most proactive and knowledge seeking individuals can manage their own personal finances. They simply do not need a continuous relationship with a financial advisor charging high fees. For occasional assistance, pick an advisor who can deliver competent, objective advice, but who does not sell financial products. If you agree with the advice, buy recommended financial products directly via the most inexpensive channel possible. When financial advice and financial product sales activities are combined, it is highly dubious that you will get the best advice in your best interest. It is much more likely that the advisor will feed his or her family first with your money.
The only reliable way to ensure the potential objectivity of any financial planning advisor or investment counselor is to pay directly for the adviser’s services, after investigating the adviser’s background, competence, and work ethic.
Pick financial advisers and investment advisers solely to obtain objective and high quality financial advice. Specific financial counsel and investment counsel is potentially of high quality, only if it is carefully customized to your particular needs and only if it is given by an adviser who is absolutely independent, knowledgeable, and competent. The only reliable way to ensure the potential objectivity of any financial planning advisor or investment counselor is to pay directly for the adviser’s services, after investigating the adviser’s background, competence, and work ethic.
There are no shortcuts. “Free” advice is never free. In fact, free advice is usually far more expensive than the advice that you receive from an advisor whom you pay directly. When you choose to obtain “free” advice, in lieu of paying fixed hourly services or a fixed fee for a planning project, the long term costs to you can be horrendously high. However, these huge costs are largely hidden and that is why this industry game of “free” financial advice keeps going on.
If you take the “free” advice of financial advisors and investment counselors who are paid by the financial services industry, you are more likely to achieve inferior long term investment returns.
Advice that is contingent on any expectation that you will purchase products through your financial counselor is subject to major conflicts of interest. Financial advisers, who are not paid directly by you, must instead derive their compensation from commissions and other fees paid by the financial services industry. “Free” recommendations lead you to buy financial products that were not the best for your needs and that are not the best products available.
Many people pay investment front end sales loads for advice that seems free. Industry representatives willingly tell you that their advice is both free and good. You just end up paying a financial sales rep to sell to you and in the process perhaps to confuse or mislead you about the facts. The industry argument is that the advice is free and that you only have to pay, if you do follow the good advice that is given so freely.
Sales charges and good financial advice are a contradiction in terms. For example, industry-paid financial advisors do not get paid to push better investment index mutual funds with the lowest costs and the best future prospects. Much better advice can be found, when you look of it. If you buy and hold very low cost, low turnover, and broadly diversified passive index mutual funds, you are more likely to get better net long term total returns after taxes, fees, and other costs are taken into consideration.
For example, when you pay a front end sales load, your initial invested assets are lower by the amount of the front end sales charge. In addition, only actively managed mutual funds will be recommended and actively managed funds tend to carry more expensive management expense ratios and higher hidden investment portfolio trading costs. Furthermore, an additional 12b-1 sales fee will get tacked on every year. With a 12b-1 fee, the same investment counselor who gave you the initial “free” advice will get paid over time to stick around and sell you more of the same. (See this article on our sister website, The Skilled Investor. It is entitled: “Investment Sales Loads” and “Returns lost to investment sales loads.”)
Financial sales loads, excessive asset fees, high cost active investment strategies, and a myriad of other suboptimal financial industry strategies and products typically bleed 1/4 to 1/3 of the typical individual investor’s portfolio annually. This waste compounds year after year after year, until individuals and their families get smart and realize that “free” is not really free and that “just of percent or two” will have a huge cumulative negative impact on their financial welfare. (See this article and another dozen Investment Performance Improvement on our sister website, The Skilled Investor. It is entitled: “Excessive Investment Costs.”)
A financial advisor or investment counselor who has a conflict of interest can be very dangerous to your long term personal finance interests.
Many industry-paid advisers are ethical and helpful. However, the reputations of ethical advisers are tainted by others who are just salespeople who masquerade as advisers. Furthermore, even industry paid advisors face a career-long struggle to be independent of financial industry influences. They must spend their careers balancing the best interests of their clients against the interests of the financial companies that employ them. They must weight continuously the best interests of their clients against their own personal financial interests, paychecks, and bonuses.
When they are paid by the financial services industry and not by their clients, think about the continuing dilemma that even an ethical person faces. Training programs for industry compensated financial advisors and investment advisors focus on selling, selling, and more selling. These people are classified as “producers” by the industry, because that is what they do. They produce revenue and profits for their companies. These revenues and profits come from you. (See this article on our sister blog, The Skilled Investor’s Personal Finance Blog. It is entitled: “The Financial Services Industry is Still the Largest S&P 500 Sector – Even after the Collapse of its Stock Values.”)
When a financial advisor is not independent of the financial services industry, you can never be certain whether you are getting the best advice or just falling for the latest financial sales pitch.
When a financial advisor is not independent of the financial services industry, you can never be certain whether you are getting the best advice or just falling for the latest financial sales pitch. Once an ethical and newly minted financial counselor emerges from a financial industry training program and starts a financial sales career, the pressure to produce is constant. His compensation program will provide incentives to take more and more from his clients and will pressure him to pull in more and more assets to manage. His company will constantly pressure him to perform and produce more revenue. (See this article on our sister website, The Skilled Investor, entitled: The Securities Industry Calls Marketing and Selling – “Advising”)
Now, think about the not-so-ethical financial adviser who is paid by the industry and thinks first about his or her paycheck and bonus, before taking care of your personal financial interests. You do not stand a chance.
US financial services industry regulation is minimal at best. When a loose regulatory environment is combined with not-so-ethical financial advisors and investment counselors, almost anything goes. Most financial consumers are confused and outgunned. If industry sales reps can push expensive, high compensation products into the “retail” financial consumer channel, they will. There is little to stop them from emptying the wallets of naive retail financial consumers and individual investors.
You have to seek out and find proactively financial advisers who are truly independent. If you become more knowledgeable about how the personal finance advisory industry works, you can better assess the quality of the financial and investment advice that you receive. Eventually, you will realize that the only financial advisor you want is one whom you pay directly and who receives no compensation from the industry in any form.
If you become more knowledgeable about how the personal finance advisory industry works, you can better assess the quality of the financial and investment advice that you receive.
The links below will lead you to over 30 personal financial planning articles related to finding, selecting, and working with a financial advisor or investment counselor. These financial advisor and investment counselor articles can also help you to avoid the many problems associated with financial and investment frauds and scams.
- Preparing to interview a financial planner or investment advisor
- Does it matter how financial planners and investment advisors are paid?
- Regulation of financial planners and investment advisors – Introduction
- Avoiding financial planning and investment advisor frauds and scams – Overview
- Are Your Best Interests the Same as the Financial Services Industry?
Note that these objective personal finance articles about finding a financial adviser or investment counselor are published on our sister website, The Skilled Investor. All articles on The Skilled Investor are written by the same author who researches and writes the articles for The Pasadena Financial Planner. (See: About The Skilled Investor.)
All materials on The Pasadena Financial Planner website and on The Skilled Investor website have been researched, written, and published independently. To ensure objectivity, no compensation of any kind has been paid by any third party to influence the editorial content of either The Pasadena Financial Planner website or The Skilled Investor website.
Financial Advisors in Pasadena California
Larry Russell, Managing Director
MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.
Lawrence Russell and Company Pasadena, California 91103
A California Registered Investment Adviser — Certificate 133101
KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION
A truly independent financial planner and fee only investment advisor
(Concerning my compensation, I provide financial planning services only on a hourly fee or fixed fee for service basis, and only under a contract that we would agree upon. You do not have to pay any form of asset fee. In addition, to avoid any conflict-of-interest, I never accept commissions or compensation of any type from the financial services industry.)
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