Make Your Financial Advisor Sweat

I was meeting with a new friend recently when she told me of an interaction with her financial advisor that completely changed her view of their professional relationship. She had received a lump sum of meaningful size, and following the advisor’s presentation of his recommendations for the new money, she did the unthinkable—she asked him how he would be compensated and how much he would receive if she followed through with his recommendations.

I know, crazy!  Who in their right mind would ask a service provider how they’re getting paid and exactly how much he or she would receive for services rendered?  The nerve of some people!

Yes, this is how the financial industry has treated the check-writers lining its mahogany-trimmed custom leather coffers for…ever.

Back to the story.  The advisor took off his jacket, began pacing and started sweating as though Ray Lewis (of the world champion Baltimore Ravens—woo hoo!) was staring him down.  The gig was up.  His list of recommendations was catered to his personal financial best interest and not his client’s; he was completely busted.  All it took was a simple question anyone would expect as common practice in any other business, and the advisor imploded.

But not everyone in the financial industry is so bashful.  I know one financial sales person, in particular, who told me of an instance in which a prospect popped the question.  He responded with indignant self-righteousness, “You have no right to know how much money I make!”  I guess he forgot that he was talking to the person making his mortgage payment that month, possibly throwing in a vacation on top of it.

Now, I’m not suggesting you become a crass inquisitor with your broker, banker, insurance agent or financial planner—they are due appropriate compensation for a job well done—but you absolutely have a right to fully understand how your advisor is compensated and to what degree, for the following three reasons:

  1. Without understanding your advisor’s compensation regime, you’re unable to balance his or her economic bias in your decision making process.  For example, if the advisor is going to make more money if you pursue one recommended path over another, you should be able to weigh that conflict of interest.  It doesn’t mean you shouldn’t pursue the option that pays the advisor more, but he or she darn well better offer compelling justification.
  2. You have other options.  Fee-only financial advisors are required to provide full disclosure of all fees received, and if they are truly fee-only (note: “fee-based” is not fee-only), they are unable to receive any other compensation from referral sources or otherwise.  It doesn’t mean fee-only advisors don’t have an economic bias, but at least the transparency offers you an opportunity to see exactly what you’re paying.
  3. You ought to be getting a service that is proportionate to what you are paying.  But if you don’t know what you’re paying, how can you know if you’re getting your money’s worth?

And here’s the best reason to ask your financial advisor how and why he is compensated based on the recommendations you decide to implement: if he starts sweating like he’s in your hot yoga class, you should probably work up a sweat yourself…running for the door.