3 Things Your Financial Advisor May Not Be Telling You

This article was written with Jim Cahn, the Chief Investment Officer at Wealth Enhancement Group. It was part of a series of articles developed under an agreement with Forbes to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

According to data from the Bureau of Labor Statistics, there are over 200,000 financial advisors in the U.S. When you’re looking at such a large group of people, there’s going to be a significant amount of variance. Some advisors may have a portfolio management background. Others may be CPAs, JDs or have come from completely different professions, such as education.

Yet amidst these different backgrounds, there’s a tendency among advisors to avoid discussing certain things. That isn’t to say these things are ignored altogether—you’ll usually find them spelled out within disclosure documentation. Rather, it means that these things are simply not openly discussed in a clear and transparent manner.

With that in mind, here are three things you may not be told when engaging a financial advisor.

1. “I’m Giving You Beneficial Advice, But I May Not Be Giving You The Best Advice”

When initiating a relationship with an advisor, people generally do so with specific goals in mind. The advisor, with their expertise, is hired to help increase the chances their clients will be able to reach those goals in a more efficient manner.

Part of that expectation is that you’ll be working toward your goals in a more efficient manner and the assumption is that you’re receiving the best advice for your situation. That certainly may be the case, but it’s not always true.

Advisors may function more as a relationship manager and less as a financial advisor. Their primary job is to bring in new assets, build a book of clients and manage relationships. Internally, they’re graded on how many new assets they’re able to bring for the firm. How well you’re doing may be of lesser importance to advisors that are graded internally on how many new assets they’re bringing in.

Furthermore, if you’re seeking out comprehensive financial advice, one advisor working alone is simply unable to be an expert in all facets of financial planning. They simply can’t know all of the intricacies of investment management, tax planning, estate planning and all of the elements of comprehensive financial planning. Additionally, since your advisor is focused on bringing in new assets, they may also be unwilling to take the time to work with your CPA and/or estate planning attorney to implement more advanced planning strategies into your financial plan.

2. “You’re Being Charged More Than You Realize”

Whether you’re working with an advisor or you do it on your own, you’re going to endure expenses when you’re investing.

Even though you can’t avoid fees entirely when investing, you can work to make sure that you’re getting good value for the fees that you are paying. Research has shown that high-quality, comprehensive financial planning can provide value to your bottom line that exceeds what you’re paying in fees.

Fees that have limited value—transaction, custodian and commission fees—should be kept as low as possible and, more importantly, should be transparent to the investor. These fees that typically don’t add value generally shouldn’t exceed more than 0.25% annually.

Unfortunately, it’s often difficult for advisors to quantify how much they’re paying in low-value fees because these fees are often hidden within lengthy disclosure statements. To help make fees more transparent for consumers, the SEC requires firms to publish the “Form ADV Part 2A.” Request the Form ADV Part 2A from your advisor, and ask them to detail where the money you’re paying is going.

3. “I Focus My Attention On Investing, Not Financial Planning”

Investment management is the sexiest topic within the realm of financial advisors. After all, there aren’t cable networks devoted to taxes, insurance or estate planning, but there are certainly networks and journalists that watch the financial markets like a hawk.

Just because there is a disproportionate amount of time spent on investing doesn’t mean the other aspects of financial planning are any less important. In many instances, comprehensive financial planning can be even more important than investment management.

Consider the importance of retirement income planning. Imagine you retired in the summer of 2007, right before the onset of the Great Recession. If the overwhelming majority of your savings is in stocks, you’d likely be forced to sell low, thereby forever locking in those losses. Smart retirement income planning means being able to produce enough income to sustain your lifestyle without being forced to sell assets when the market is down.

And that’s just one example. Tax planning helps limit how much of your gains are lost to Uncle Sam. Smartly incorporating life insurance within your estate plan can help you be ready to pay for possible estate taxes, recouping the costs of settling your estate or increasing the amount of money you’re able to leave to your heirs.

There are, of course, many great financial advisors out there who are focused on their clients’ best interests. That said, it’s important to know the things that advisors may not be upfront about, and how what’s unsaid could limit your ability to build long-term wealth.

The inverse of this is also true. A growing number of advisors focus on financial planning to the detriment of their clients’ portfolios. Working with a team of specialists that amplify both the planning and the investment prowess of your financial plan is the key to long-term financial success.

Click here to see the article on Forbes.

More Posts

Scroll to Top