How to feel empowered when speaking with your financial advisor

Do you feel intimidated or out of your depth when you speak to your financial advisor? If yes, this post is for you.

In my 93 conversations with ordinary people about emotions and finance, the theme of uncertainty and mistrust about financial advice (and financial advisors) has come up consistently. Many people feel afraid or avoidant about asking their financial advisor direct questions, and don't know what information their financial advisor is required to give them.

The context for this post comes largely from four conversations. Harry is a retired man in his 70s. Isabel is self-employed and in her late 30s. Karl is in his 50s, married, and owns significant assets.

Here are some points that came up in these conversations regarding financial advisors:

  1. Your financial advisor works for you

Financial advisors are service providers who work for you, the same as a plumber, accountant, real estate agent, or web designer. If they are not doing a good job you can and should fire them, or do the job yourself. In my opinion, handling your personal finances and investments yourself is much easier than learning plumbing or web design (could be wrong about this, but I think anyone can learn the basics of financial management in a short amount of time).

However, they are usually not fiduciaries. A fiduciary is a person who has a duty to act in the best interests of another person, and not put their own benefit or enrichment ahead of the best interest of the other person. Lawyers have a fiduciary duty to their clients, and I believe doctors are also fiduciaries to their patients. Most retail financial advisors are not fiduciaries and do not have a responsibility to act in your best interest! They can and do enrich themselves at your expense on a regular basis.

Realizing that your financial advisor may not be acting in your best interest may generate emotions of anger at having your trust betrayed, shame at being duped, or fear about confronting your advisor in order to make a change.

These feelings are normal.

  1. How compensation works for financial advisors

Karl and his wife decided to diversify their assets away from real estate and hired a financial advisor. The advisor put them into an assortment of mutual funds. Karl described feelings of unease and confusion:

  • "We don't understand how the financial advisor makes money"
  • "We're not clear what mutual funds we're holding"
  • "We don't know what the companies are doing"

Most financial advisors derive a sizeable portion of their income from commissions, usually as a percentage of the assets they manage. Percentages of something are very common in the financial industry and are a big reason why finance people can be so rich. Retail brokerages like Edward Jones and Raymond James will charge you a percentage of the total assets they manage for you (usually 1-1.5%), plus a commission on each trade they do for you. They will also put you into expensive mutual funds that may charge an additional 0-2.5% of the total amount you invest in the fund. Some of these expensive funds may pay kickbacks to advisors who recommend these expensive funds, not in cash, but in the form of expensive dinners, trips to the Bahamas for a "conference," etc.

Since these brokerages DO NOT have a fiduciary duty to act in your best interest, they will put you into investments they think are "suitable" for you but primarily serve their own interests. They'll also advise you to trade in and out of different stocks and funds frequently, known as "churning," to generate additional commissions off of your account. And they'll put you in these really expensive mutual funds because they're suitable for you, even though you could get more or less the same stocks using vastly cheaper investment vehicles through a discount brokerage like Vanguard.

There are financial advisors out there who act as fiduciaries for you. They usually, but not always, charge flat fees.

  1. Financial advisors are required to give you information about your account

Harry wasn't sure what information he was allowed to get from his financial advisor:

  • "How do I know what fees I'm being charged on my account? Is he required to tell me?"
  • "If I ask for this information, will my financial advisor become upset with me?"

Financial advisors are required to provide information about your account, trades they do on your behalf, the fees they charge, and many other things, whenever you ask for them.

Remember, your financial advisor works for you, not the other way around. None of them are ever going to come forward and tell you that they took a family trip to China because of all the fees they generated from churning your account, or the kickbacks they got from putting you in some ridiculous mutual fund that charges 1.9%. But you can ask about these things. The more vague the answer, the less trust I would put in the person.

Here are some questions you can ask your financial advisor:

  • Do you, or does your firm, have a fiduciary duty to me? Yes or no?
  • What fees do you assess on my account? Do you take a % of assets? Do you charge a commission or fee on trades? What fees do the mutual funds you put me in charge on top of what you charge?
  • What fees did you take from my account last year? How about over the life of my account with you?

You may feel fear or avoidance around posing these questions to your financial advisor. They are tough questions to ask. There's a challenge embedded inside these questions. Confronting people is inherently hard.

  1. You can move your assets to another firm at no cost

You are the owner of your financial assets. Your brokerage and your financial advisor are not the owners. You can take your portfolio and store it at any company you want.

The best places to host your portfolio are low-cost brokerages (like Vanguard) and if they're high-cost, brokerages that actually have a fiduciary duty to their clients.

This conversation can be hard. Implicitly, it can feel like you are telling your financial advisor, a person who you like and has been nice to you in the past, that you don't trust them. It's inherently hard to attack or criticize a person who has treated you well in the past.

(However, if your financial advisor has been polite to you to your face while ripping you off with high fees, they haven't actually treated you well. They've been stealing from you legally.)

In Isabel's case, the financial advisor was a relative:

  • "I feel like my cousin has been taking good care of me. He also manages my parents' and my sister's money. But he is regularly taking family trips to China and Europe. I don't know how he's able to afford that."
  • "I'm afraid of making a big stink with him and everything that goes with that inside the family."

I showed Isabel what her cousin's firm charges just in asset management fees: 1.39% annually. If she invested $10,000 per year over 40 years (age 25 to 65) with this firm, they would take about $130,000 from her in fees over those 40 years (counting compound interest). This doesn't even count the cost of the trading commissions and the expensive mutual fund fees.

$130,000 pays for a lot of trips to China.

  1. Are financial advisors worth it?

In my opinion, 80% of financial advisors destroy value for their customers.

The 20% that add value are those that 1) have a fiduciary duty to their clients or 2) have clients whose financial lives are so complicated (athletes, celebrities, etc.) that it's worth it for them to pay top dollar for white-glove financial service.

Some financial advisors say that they help their clients avoid emotionally-driven financial mistakes, like panicking during a financial crisis or getting swept up in some kind of scam. This may be true. But I'll suggest that if you need help dealing with your emotions as they relate to finance, you can get a therapist for way cheaper than $130,000. You can also read my blog for free.

If any of this stuff resonates for you, I'd love to hear about it. Send me an email and we'll talk.

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