4 Ways Financial Planners, Financial Advisors, and Financial Representatives are bad news
Not all financial advisors or planners are bad, just most of them. I want to provide you with some ways that financial advisors slime people because I’ve gotten fed up with the industry after seeing it from many angles
After leaving my time as a Pastor at Eagle Brook Church, I was recruited into the financial services industry by a “faith-based” insurance company. I loved the idea of working for a company that helped people be wise with their money and I ended up completing the intensive Series 7, series 66, and life insurance licensing.
We had thorough training to go out and provide comprehensive financial plans for people, that always recommended our financial products.
Many financial advisors might see my short stint and assume that I just didn’t have what it takes to make it; to which I nod my head. I didn’t have what it takes to make it, because I didn’t have the ability to push people’s money into expensive A-shares, variable annuities, and permanent life insurance contracts that were doomed to fail. I had a passion for connecting with people, adding value, and providing great financial advice; advice that would genuinely line up with their best interest.
Here are 4 Ways Financial Advisors are Bad News
1 – The Company and Recruiters Don’t Really Care if they Make It.
This sounds ludicrous, because one would assume that all recruiters want their advisors to stay on board and bring in massive assets under management.
This is a big deal because most advisors aren’t in it for the long haul – not a great thing for a customer…
If companies and recruiters (managing partners,) truly cared to keep people in the business, the compensation structure would be aligned in a different manner. Sure, you can make massive amounts of money as a financial advisor, but that’s only if you’re comfortable selling variable annuities to unsuspecting individuals. More on variable annuities later – but I’d like to really hit on this idea that the financial companies and managing partners don’t really care if advisors make it. There are three pieces of evidence to prove this:
- The first commissions from their personal network roll up under the managing partner if they fail
- The compensation structure causes honest consultants to be unable to make it long term
- A trail of failed advisors leads to a build-up of assets under management
The first commissions roll up under the managing partner if they fail:
Advisors who come on board, always bring enough assets over to build up tremendous AUM for the branch or partners. What happens if an advisor doesn’t make it? The clients and assets they’ve brought over get placed under the regional team. The clients and business I wrote when I was a financial advisor, have all rolled over to the managing partners, or their most prized advisors.
Think about it, every new financial advisor does their first business with:
- Personal rollovers
- Personal life insurance
- Parents, Spouse, and family rollovers
- Parents spouse and family insurance
- friends rollovers and insurance
- Prospects they’ve actually obtained thorough marketing
Those first 5 pieces of business happen pretty easily, but advisors often fail when that business is finished.
So why do financial recruiters and managing partners only slightly care if a person makes it? Because that recruited advisor is the equivalent of bringing an entire personal network of assets over.
Ultimately, a newly recruited advisor can quit after bringing over the assets of their network, and the managing partners still win out big time. In fact, the managing partners might even prefer that a struggling advisors quit, because assets would roll directly under the manager, and they might benefit from a higher cut of the trails (12b-1 and Wrap fees)
The compensation structure causes honest consultants to fail
If you don’t write variable annuities and permanent life insurance, you’re going to fail as a financial advisor.
Variable annuities pay between 2.5% and 10% commissions of a total rollover, most companies pay about 4%.
That means if you bring over a $100,000 Variable Annuity rollover, you’d make $2,500 to $10,000, depending on what you ended up “recommending” in your financial plan to your client. If you put people’s money in an “A-Share,” or front end mutual fund, you’d earn about half of that amount, or even less.
When you sell a mutual fund, you’re compensation takes a huge hit compared to selling variable annuities.
The bottom line? Most advisors don’t even have an opportunity to do what’s right, because the compensation structures reward improperly.
Most advisors are forced to sell products, not provide great advice. Not only that, but they are forced to sell products that are not in the best interests of the client.
That leads me to the second way most financial advisors are bad news for people
2 – They Sell High Commission, High Fee Products to Unsuspecting People
Variable Annuities are the cigarettes of the financial services world.
Most financial advisors can’t pay their mortgage unless they sell variable annuities or permanent life insurance – that’s how the compensation structure works.
Internally, these horrible financial products are talked about so lovingly, that you forget that you’re selling the equivalent of cigarettes for your investment.
Reasons Variable Annuities are Garbage
- Only non-qualified dollars, or non-IRA money could even slightly be justified to be in a Variable Annuity.
- TAXES – Gains of an Annuity are seen as income and taxed at a high rate, meaning that non-qualified money would be MUCH better off in a simple dividend or tax sensitive brokerage account
- OPPORTUNITY COSTS – They are usually managed HORRIBLY compared to an index fund
- FEES – They have super high fees
Most of the variable annuities that I came across, had the same “upside” effect of a basic mutual fund, but with fees that were much higher.
- Average Variable Annuity Fee after total expenses – 3%
- Average index fund fee from Vanguard (s&p 500 mutual fund) – .2%
That’s a 2.8% difference.
Let’s say you managed to find a variable annuity fund that matched the long term effects of the S&P 500 index fund, and you invested 50,000 for 30 years.
- Variable Annuity $50,000 at 8%, with fees of 3%, for 30 years = $223,387 (5% interest)
- Index Fund $50,000 at 8%, with fees of .2% for 30 years = $465,146 (7.8% interest)
That’s a BIG deal. The extra 2.7% over 30 years, reduced the savings by HALF!
These figures are examples, but I challenge people to dig into any Variable Annuity they are being presented, and check the numbers. These are pretty typical.
Only non-qualified dollars should ever go into a variable annuity (if you HAVE TO)- and I still could find a dozen other ways to invest non-qualified, taxable dollars that are better than a variable annuity. Taxes are the next reason they are such awful investments.
A variable annuity is just a concoction made especially to benefit insurance companies.
They function SOMEWHAT like a mutual fund, but are much more complex and harder to understand for regular people. The bottom line is that the insurance companies went out and got regulators to approve this tax deferred investment.
The thing that professionals will call a “benefit” of a variable annuity, is that it provides tax deferral for non-qualified money. “Non-qualified” “money that’ not in an IRA.”
Non-qualified dollars will have their gains taxed as capital gains, their interest taxed as income, and their dividends taxed as dividends.
But the variable annuity provides tax deferral…… BUT the tax will still be paid in the future when you withdraw the money, and it will be recognized as regular income tax rates. That’s MUCH higher tax than capital gains (usually for most people) or dividends. It is the same tax rate as interest earned from a bond though.
I highly recommend that people look at a tax-sensitive, or dividend focused, index ETF or mutual fund from Vangaurd, rather than a variable annuity.
Tax deferral is why the annuity should never house an IRA or other qualified dollars. The IRA “wrapper” is giving a tax benefit, and then you’re “buying” a tax benefit in an annuity, in the form of a fee. That’s why, it is unsuitable and never in the client’s best interest to put IRA money into a variable annuity.
The second problem with the tax deferrable, is that when you invest in a variable annuity, you’re converting what would usually be dividends and capital gains, over to the annuity taxing rate – as regular income!
If you just kept your taxable or unqualified dollars in a brokerage account invested in a tax-sensitive index fund at Vangaurd.com, then you’d be in much better tax treatment than putting it in a variable annuity and paying full income tax on gains.
Tax Deferral is good for Wall Street, not so much for Investors.
There’s a sneaky little fact that people don’t think about: Wall Street fees are all collected in dollars BEFORE they are taxed.
Think about that…… Wall Street might charge a mutual fund around 2% as an internal fee, but if that money is pre-tax, they get 2% of a HUGE AMOUNT.
That means wall-street might be one of the biggest tax benefactors in the world! In a way we don’t really talk about.
3 – Wrap Assets Under Fiduciary are Just as Bad
I just showed you how much fees might be costing someone, now lets remember that those fees go to the same wall-street that paid Hillary Clinton $250,000 per speech, and loves both democrats and republican law makers.
I’m bringing this up becuase there is a new department of labor law that was trying to move the standard for financial advice from “suitable” to “fiduciary.”
Right now, financial advisors are able to sell, as a financial representative, products that are suitable. Suitability standards are pretty low. These bureaucracy loving folks are driving towards the “fiduciary standard,” where advisors must do what’s in the best interest of clients instead.
The response has been for agents that once built all their wealth in the variable annuity game, to build up their “managed platform.”
Long story short, it’s a program where people pay a wrap fee for active management of mutual funds.
Not only is the mutual fund an actively managed investment product, but then there is more churning going on with multiple mutual funds.
The result is that people pay a management fee to an advisor, who will use their “fiduciary management platform,” to manage their assets.
This leads to super high fees.
This is great for an advisor, if they build up the assets high enough.
Most of them will charge 1%, which means that with $10,000,000 of assets under management, they would make $100,000 a year from fees. That’s 40 $250,000 rollovers.
The costs are actually super high in these managed products. Usually they are using no-load A-shares, and a fee on top of that. Most of the funds have internal expenses of .8%-1.5%, and then the management fee for the fiduciary company is like .2-.8%, and then the advisor takes 1%. That means that people are “all in” for about 2%-3.5%
The worst part is that the fees are NEARLY IMPOSSIBLE to tally up properly, and are extremely opaque.
4 – They’re forced to look out for their own self-interest, not the client
How can someone knowingly reduce a person’s life savings by close to half? I mean seriously, how can someone do this to another human being?
I showed you in the example above, that putting people’s money in a variable annuity, could (very well likely) end up leaving the person with a retirement account that’s half the size as it should have been.
What allows people to take half the savings of a person? Self interest.
The bottom line is that advisors that stay in the field, can only stay in by selling variable annuities until they build up a book of “wrap assets” that are just as bad of a deal.
So an advisor is usually forced to ignore the way they are draining retirement accounts, because they need to take care of their family as well.
I don’t always blame the advisor, but I do blame the companies themselves because the investment companies choose to build compensation structures that reward shady behavior.
I know that most advisors are simply trying to build up their business and help people, and the coaching, training, and culture just wipes away the questionable stuff.
I spent time in the industry, and my main beef is that the industry compensation structures are meant to reward advisors for doing what’s not in the best interest of the client. Even if the new laws get passed, nothing really changes because they just switch their products to abide by the new rules.
I love index funds from Vanguard and Schwab. I’m not getting paid by them, but I can’t deny their amazing fee structure and indexing purity. Check out Bogleheads.org to learn more.
Also published on Medium.