If you’re currently considering using an advisor to help invest some of your money, you may be wondering whether you should opt for a fee-based advisor. The past decade has seen a serious increase in the amount of fee-charging investment services—largely due to how lucrative the business strategy is for advisors and money management teams.
Fee-based advisory services have become the norm, and while this is good for advisors, you should make sure to do your own research prior to investing.
The fee-based financial industry has ballooned from almost non-existent to an industry worth over $2.8 billion. For this reason, the majority of money management advisors you’ll come across will be fee-based. We’ve compiled a list of the top three problems you may face if you opt to work with a fee-based advisor.
Let’s take a look at some of the real facts behind fee-based advisors.
Fee Based Advisors Often Don’t Manage Your Money
When you speak to an advisor, you may automatically assume the money you invest will be managed directly by the advisor. While this can be true, many money management advisors are actually just glorified salespersons. They’ll give you an overview of an investment strategy, along with analysis on a range of financial products, but they outsource the money management to a third party.
This means that, not only is your advisor not actually managing the money on their own, you will most likely end up paying more fees—as your financial advisor will have to compensate his money management partner. The advisory industry has switched from a product-based mentality, to a client relations based mentality—and many advisors are there just to tell you what you want to hear and sweet talk you into investing with them.
Once they have your money, they send it off, and that’s a wrap, job well done—so they tell themselves.
If you do opt to work with a fee-based advisor, you’ll want to have a list of questions to ask in your initial meeting. Educating yourself on the various financial products available is one way to ensure you can ask productive and insightful questions. You’ll also want to ask directly if the individual you’re speaking with is the true money manager.
Remember, the more educated you are, the more likely the long-term results will be fruitful.
Fee Based Advisors Rarely Beat the Market
Is your fee-based advisor making promises you don’t think he can keep? This is one of the most important questions you should ask yourself prior to opening an account with an advisory.
Many people operate under the misconception that money managers and fund managers consistently beat the market. This is entirely untrue; in fact, studies show that almost no fund in the United States consistently beats the market. The S&P 500 traditionally out performs most funds and investment providers, and has no associated fees or commissions.
Another common argument in favor of investment advisors is that they hedge against downturns in the financial markets. But funds are just as exposed to market forces, and can actually end up losing more money than traditional indexes during financial catastrophes.
This is why investors like Warren Buffet are constantly making wagers against advisors and money managers to beat the market, because they know it is extremely unlikely.
Ask for a full history of management performance if you opt to have a financial advisor, and try to take care of your money. But remember, just because a manager has beaten the market in a previous year, doesn’t mean they will be able to do so again. Many investors allow advisors to gamble with their money simply because the advisor has had luck in a previous year.
Your Fee May Create Risky Behavior
It may seem far-fetched, but paying you’re advisor a fee can actually create risky investment behavior. Be wary of advisors who move your money around a lot, this can often be done in order to provide you with justification for using their services.
It is often recommended that when you invest in funds you have a long-term mindset. Advisors who are moving your money from fund to fund, or investment product to investment product, may not be doing so in your best interest. They’re effectively gambling with your money, and appearing to be productive at the same time.
Advisors do this in order to create the illusion that they are being proactive on your behalf. Many investors are ill equipped to understand the mechanics behind safe investment strategies, and fee-based advisors are able to prey upon this ignorance. You’ll find that many advisors print out fancy charts and analysis about the funds they’ve invested for you—don’t be fooled by this sales pitch. You want someone who values risk averse, long-term investing.
If It Sounds Too Good to be True, It Probably Is
As mentioned previously, set fees have become the norm in the wealth management industry. This is because it guarantees income regardless of performance. While advisors technically have a fiduciary duty to provide you with the best possible services, it’s often hard to tell if they truly follow their mantra.
A fiduciary responsibility doesn’t protect you from bad investments or a bad advisor. Honesty doesn’t protect against losing money.
The industry is riddled with glorified salesmen who focus on getting you in the door and promising you the world. They often do very little research into the products or services they’re providing you. Remember—gambling isn’t investing. In the end, the only one who hurts from massive market losses is you.