The Problem with the Industry: Unqualified Advisors and Poor Investment Choices
I'm a tax attorney, so I see a lot of other people's finances.
The ones I see that work with a financial advisor are, without exception, paying at least 1% of AUM in fees to be in higher-costs funds that underperform the index funds in the long run. To make matters worse, the financial advisors choose tax-inefficient funds and take their fees in the most tax-inefficient way possible. I have also found that many do not understand the nuances of self employed retirement plans or the backdoor Roth.
In my view, there are a few problems with the industry. First, most financial firms hire salespeople and then teach them finance, instead of hiring people who already know finance. I know a LOT of morons working in Edward Jones shops and the like, who are charming but ultimately don't understand the back end of the products they sell. My ex worked for two of the large regional banks in my area, and she had a degree in communications.
She knew (and knows) nothing about finance, but instead was hired because her family is wealthy and gets referral business from old neighbors and classmates. She couldn't even pass the Series 7, but the banks thought she could work in trust management. I talk to clients and financial advisors all the time who don't understand the difference in tax efficiency between mutual funds and ETFs, or the mechanics and reasons of a 1031 exchange, or what the tax incentives actually look like in various types of accounts, or the merits of a solo 401k vs a SEP IRA.
When you only have a hammer, everything starts to look like a nail. Second, the incentives are rarely aligned in the middle of the market or below. Helping a 24 year old set up and fund their Roth IRA is probably not worth your time on the front end unless you're getting an outsized commissions, which ultimately cost the client more money than needed for someone with a small account.
Related Horror Stories
Warning about some "financial advisors", "financial planners", etc
I was approached by a "financial advisor" who offered free financial advice. This planner was a friend of a friend, so I agreed but told them straight off the bat that I was not looking to hire a financial planner. They said that was fine, and that the advice would certainly be free because I’m a friend of a friend.
This is where I made my first mistake. After a few meetings, this advisor gave me a "financial plan" that included paying for term life insurance AND whole life insurance AND disability insurance (all policies under the company they work for). These would come out to $4,700/year when my salary is only in the $80-90k range. Not to even mention that I am 22 years old with no dependents and have no need for life insurance. This "financial plan" also didn’t include rent, mortgage payments, car payments, or anything else I might need to pay in the future.
I can understand being advised to get disability insurance, but this financial advisor knew that I had not even signed up for my company’s disability insurance and so would not be able to make an informed decision on it. I told this person "no," but they tried to convince me I was making a bad choice. They told me that whole life insurance was a good investment, even better than investing in some index fund, and generally made it sound like this would be the worst financial decision of my life.
I asked my friend about this, and it turns out his mother also sells life insurance. The difference is that she’s ethical and only sells whole life insurance to people who actually need it (i.e., not people in their early 20s who have no health issues and no dependents). I found out that whole life insurance is not an investment, and if it is, then it’s a pretty lousy one. I found out that I probably don’t need two different life insurance policies at the age of 22 with no dependents.
My point is, there are certain people passing themselves off as "financial planners," "financial advisors," or "financial whatever" who tell you that they want to make sure you’re financially secure and would only want to advise you to do things that are in your best interests. These people are snakes, but somehow, they are able to legitimize themselves behind a big company. I’ve heard that a lot of them target younger people and use fear to convince them to buy a bunch of insurance they don’t need.
Just be careful, fellas, and do your own research.
"Financial Planners"--the grifters of the business world
A recent series of encounters with a "financial planner" would be funny if it wasn't so predictable. I have a reasonably healthy amount of money in the care of the investment department of a regional bank. The new "financial planner" at the bank apparently noticed this money, and started to send me emails pitching me on---wait for it--single-premium life insurance. His idea was that I could use the money to "build a family legacy that will last for generations" Barf.
It would be funny if it wasn't so predictable. I had to meet with him about changing some investments within my SEP/IRA. In the meantime, he was helping me set up a Donor Advised Fund. This is a fairly labor-intensive process, with no immediate benefit to him or his bank, and he was taking care of every step of it for me. If the process of setting up the Donor Advised Fund had involved him wiping my backside, he would have done it with smile, while asking me whether I preferred Charmin or AngelSoft.
Two days ago, we met at my office. After we did the necessary stuff for my SEP/IRA, he turned to the life insurance pitch. I cut him off and said, "If this is about life insurance, I'm not doing it." At that point, he left my office. Yesterday morning, bright and early, I got a email from him giving the contact information of various people who I needed to talk with to finish setting up the Donor Advised Trust, along with his sincere best wishes that I could successfully complete the task on my own.
As long as he saw me as a live prospect for high-commission financial products with high internal costs, he was willing to wait on me hand and foot. Once the prospect of selling me life insurance was over, I was "dead to him." Again, it would be funny if it weren't so predictable. Something to keep in mind concerning the priorities of "financial planners." (Hint: It 's not you.)
Surrounded and Pressured
At one time, just after returning back from UK, I had a significant balance in my HDFC savings account. HDFC people started calling me stating that they will send a special advisor to help me get good returns - better than savings account; all free. So I invited them to meet me at my home (COVID times).
At the first instance two gentlemen came and started preaching about HDFC Life Sanchay Plus scheme. I was not interested but I did not wish to sound rude. So I told them that I will think about it and meanwhile they can send me prospectus, etc. The next week the two came back.
They first called and said that their senior, a lady, would also like to meet me to explain the plan, options, benefits, etc. They came with rather good looking lady. This is a typical ploy. There is a group of people about 3–4 who come and target you. One of them is a pretty girl/lady who will go on to explain how life is uncertain, how one must be ready for the future, how their scheme works the best, etc. This is a psychological ploy.
First you are surrounded and hounded. Then the pretty lady, without saying so, tell you how you are making a colossal mistake. They play on your fears. You don’t wish to look stupid in front of a pretty lady. So you cave in. Once again, I was not convinced. I said I didn’t need insurance plans or pension plans. I may be open to look at investment plans and retirement income plan. Again, they went (or tried to go) for the jagular. They said that this plan they were suggesting “guarantees me” income for any term that I chose - 10 years, 30 years, life. The amount is free of tax. At my death, my nominee/heir will get the full invested amount, etc. I told them - let me think.
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