As an advisor, it is encouraging when a new client chooses to work with us as opposed to their current financial professional. It means that we are communicating our message of diligent financial planning and common sense investing and that our clients value that. However, at the same time, it is a bit worrying. We see many account statements from other firms and the things we see range from underwhelming to downright highway robbery!
It would be tempting for me to say that this discrepancy in service and our ability to acquire new clients is proof of our superiority as financial advisors but that would be disingenuous. There are many fantastic financial advisors that I would have no problem referring to. While we do our best to bring value to our clients, what sets us apart from the pack seems to have more to do with what other advisors are not doing rather than what we are. In other words, the financial advice industry has a laziness problem. The slothfulness of modern financial advice can be seen in a few ways: Uninspired investment management, lack of communication, and product sales.
Uninspired Investment Management
Back in July of 2020, I wrote about the dangers to consider when investing in index funds. Now almost a year later, I feel very much the same way and continue to see this investment tool abused. I would also like to reiterate, as I did a year ago, that index funds are in no way inherently a bad investment. In fact, we utilize them in our client’s portfolios as well! However, the way that we have seen them used today as a blanket investment “strategy” is what has me concerned.
To refresh your memory, index investing is the strategy of buying all of the holdings of an index (like the S&P 500 for example) in order to closely track the performance of that index. These funds have very low expenses given that they are very low maintenance for the investment company. An individual investing solely in index funds could reasonably expect to see a return on their investment equal to that of the index (or slightly less given fund expenses).
If you have a long time until retirement, want something that is low maintenance, and you are not working with a professional, then this could be a prudent strategy for you. However, if you are paying someone to manage your investments and your portfolio is invested strictly in index funds then you are not getting your money’s worth! Anyone is able to open an online brokerage account (oftentimes for free) and invest in an index fund. Why on earth would you pay someone to do something that you could do yourself?
An advisor worth his salt will listen to your goals and objectives and design an investment portfolio to help you meet those goals. They will review your portfolio regularly and make changes where necessary. Your portfolio should carefully balance performance and risk and put you in a better place than you could have achieved on your own with index funds alone. Simply charging you a fee to invest in index funds? That is laziness in the extreme.
Lack of Communication
In any relationship, communication is key. If you neglect to catch up with a friend or family member for an extended period of time then you should expect that relationship to deteriorate. Your rapport with that person will suffer and you will not be in the loop with the current happenings in their life, both good and bad. This is just as true in your relationship to your financial advisor.
If you are paying a professional to manage your investments and maintain your financial plan, it is reasonable to expect that professional to stay in touch with you. You ought to hear from your advisor throughout the year if for no other reason than a standard annual review. Better yet, your advisor contacts you with ideas and reminders to help you stay on track and learn more about investing and the markets!
The point is, your contact with your financial advisor should not end when you sign the account application or receive your complete financial plan. The whole point of hiring an advisor is to have someone there, not only to manage your investments, but also to act as a sounding board for your ideas and a confidant when times get rough. It is pretty difficult for an advisor to do either of those things if they do not put forth the effort to maintain a relationship with you.
I am always blown away when a prospective client shows us their statements and they are filled with products that they do not need and only serve to pad the “advisor’s” pockets. With the multitude of lawsuits that have occurred over this very thing, one would not think that this would still be an issue. Yet, the problem of salespeople selling unnecessary products for a big commission persists!
You may be wondering, what do I mean by “unnecessary products”? Well, products that pay a commission, like different types of insurance policies, are often sold to clients who do not explicitly need them. Why would an advisor do that? Because often times they pay big commissions! The most commonly miss sold insurance product is the annuity. Do not get me wrong, annuities can be fantastic tools for building an income in retirement but they can also be abused to make the advisor a pretty penny. I wrote an article about the legitimate reasons to purchase an annuity, which you can find here[i] .
The bottom line is, trust your gut. If you feel like you are being sold a product instead of a plan then you are probably correct. Like anything in life, financial tools like annuities can be abused in the interest of a salesperson rather than the client they are claiming to help. If you feel like you might be in this situation or already own a product that you can’t get out of, let us know and we will do our best to help!
I really enjoy writing these blogs and I hope to do many more! However, it can be challenging to come up with new topics to discuss every week. Which is why I would love to hear from you, my readers! Have a burning question that you want to ask? Fire away! Shoot me an email and I will do my best to answer it. Today’s song of the week is in honor of my beautiful baby girl (and Provisio’s Chief Cuteness Officer) Lucy Jo who turned a year old over the weekend! Enjoy! Song
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.