In US there are about 300,000 people that call themselves ‘financial advisors’. This group while large and have ‘advisor’ in their title don’t usually act as such. Instead of taking their word, let’s just look at what they do and decide what to call them.
The world of money and advising has been persistently complex, and in my opinion by design so. It is much easier to ‘hide behind complexity’. But when there’s data that people are suffering due to financial illiteracy, making poor money decisions, debts piling up and stress from it are at an all time high we have to see if anything different can be done.
Which brings me to the world of advising, that I’m part of. I know that the majority of people cannot distinguish a financial advisor (who acts in the best interests of the client, also known as a ‘fiduciary’) from another that doesn’t. This division alone is one of the most important to get, much bigger than what to actually invest into.
The word ‘advisor’ comes from the word ‘advice’ which in the dictionary is explained as “guidance or recommendations concerning prudent future action, typically given by someone regarded as knowledgeable or authoritative.” In addition, we use the word ‘advice’ often from trustworthy sources like our parents, a family doctor or a good friend that often give us advice if we have a need or have a question. We inherently connect the word ‘advice’ with trust. In ‘financial advisor’ we connect that word with a trusted person that will help us do better in our money matters.
And that is where the ‘advisor’ part in ‘financial advisor’ lets us down, in a sense tricks us and gives us false hope. The majority of those 300,000 financial advisors I mentioned above, act as a salesperson of their financial firm and while giving us ‘advice’, it is their firm that they owe the trust, not necessarily to the client. They offer suitable (or good enough) suggestions primarily related to the financial product they’re selling that mostly helps their firms and themselves in the process, and most often not even asking us for a payment for their ‘advice’. What kind of advice is this? The advice is for the client, but the payment to the advisor is done by someone else? Shouldn’t this raise red flags as to whom these advisors have loyalty to?
The truth is that this is NOT advice, but just a product being sold with an incidental advice that pertains just to this sale.
This is equivalent to buying a Toyota and the Toyota salesperson advising you on some features of the car, but he can’t sell you a Honda or BMW or even let you know about any other cars’ features, including the price that may be superior to the car he’s selling.
Not unreasonably and due to the complexity and financial illiteracy, a majority of investors believe that this advice is free, or maybe they think is paid by the products they purchase, but almost rarely know exactly how much that is. We pay all our bills and even negotiate for a $10 discount here & there, but don’t know exactly what our investments (that will potentially be our largest asset) cost. How is that advisor paid and how is that company he works for making any money to afford the best real estate in town? What if you were told that those fees over years add up to hundreds of thousands of dollars, would you worry then?
About half think they don’t pay any fees or don’t know what they pay