How Are Financial Advisors Like Congress?

June 24, 2015

If you voted for your congressman then they’re great but the rest are bums and if you voted against him then he’s a crook like all the rest. The same feelings are often held about financial advisors. How can the industry have such a bad reputation if so many people think that they have the only good one?

The truth is that your relationship with your financial advisor is just that, a relationship. That doesn’t mean that you should buy each other flowers or worry about their feelings more than the results, but you should put more time and effort into this relationship than you do your Facebook profile. I have seen literally hundreds if not thousands of client-advisor relationships over the years and most of them are pretty dysfunctional.

I’m a big fan of the syndicated sitcom How I Met Your Mother and in one episode, Lilly won’t let Robin and Barney out of the apartment until they “define the relationship.” It may sound silly, but that should be the very first thing that you do with your advisor. What do you expect out of them and what do they expect out of you? I know several advisors who are GREAT at building portfolios and do a good enough job to justify their fees and more but they still end up losing accounts because the client wanted more than investment advice. They also wanted advice on whether or not to refinance the mortgage, how to pay for college or when to take Social Security.

It doesn’t matter what type of advisor you want. It could be someone strictly to manage your investments or insurance needs, a comprehensive financial planner or a tax-oriented professional. Know what you want and don’t accept anyone who doesn’t fit those criteria.

Another “relationship mistake” that people make with their spouse and their advisor is that they forget to talk. In marriage, we often get so focused on the kids, our careers and just getting by that we don’t make time for a date like we did before. If you ignore that too long, you start to grow apart and strain the relationship. The same concept works with your advisor. You have to stay in contact with each other to know what is important.

Lastly, too many people have no idea how much they pay their financial advisor or in what way they get paid. I opened this story comparing advisors to politicians and here is where I think it is especially true. Back in the day, politicians used to travel from stop to stop making all kinds of campaign promises – even if they contradicted their voting record or what they just said at the last stop.

Don’t get me wrong. Plenty of politicians still try to get away with this but now when everyone has a smart phone, it is almost impossible to get away with this kind of deception. We hold our elected officials accountable because we’re more likely to know how they voted or what they said. Unfortunately, we don’t always hold our advisors accountable because we’re not always clear on how they are paid.

I worked with a doctor once who had an advisor that served several doctors in his community. Everyone in the physicians’ lounge touted his praises except that they didn’t quite realize how much they were really paying him. He had them in complex investments that required a special IRA custodian to hold those funds, which cost extra and also meant that they lost out on the tax benefits of those choices. He used annuities inside retirement plans, which added to the cost but not the investment options or results.

This particular doctor lost several thousand on some investments that probably were not suitable for his retirement nest egg, he paid an extra $3 – $5,000 per year in fees that he didn’t need to and his wife couldn’t stand the advisor. But the advisor was the one who drove a new Cadillac every year all because the good doctor never stopped to ask how this advisor was being paid. Just like with politicians, it’s important to follow the money.