Where s The Beef? - Getting The Financial Advice You Paid For
There's nothing better than a hot and juicy steak, especially one from your own grill. But, can you imagine going to the grocery store to pick up a few prime ribs, only to get home and realize you ended up with cube steak instead? Talk about injustice! Of course, this doesn't happen to most of us, because grocery stores package their meat in clear plastic wrap, so we can see exactly what we're buying. If only we bought financial services the same way.
True transparency is sorely lacking in an industry that packages itself with imposing-sounding credentials, slick advertising and carefully orchestrated seminars. Many investors are convinced they are receiving the "prime rib" service they're paying for, without realizing all they're getting is some chewy cube steak.
That was the case with "Bill," an investor I talked with recently. Bill had two million dollars in investable assets and was using a number of different advisor services to manage his wealth. Some of them were commission-based while one was fee-based. But, all of them were using mutual funds exclusively, and none of them were aware of Bill's total financial picture.
The firms that Bill was using were very professional sounding and had nice offices. Their credentials were good and they were obviously successful (at least in gathering new clients). Each had convinced Bill to trust them with hundreds of thousands of his hard-earned dollars and invest in their "unique" strategies.
The problem was their strategies weren't that unique. They were basically just splitting Bill's money between different mutual funds. One commissioned advisor convinced Bill to also use a timing service to get in and out of the mutual funds he had at his firm. Bill had to pay dearly, with a 3% commission on the initial investment, then an additional 2% a year just for the timing service.
The other advisors' fees weren't much better. One, a local franchise of a national mutual fund supplier, charged 1% per year. But all they had done was help Bill with the initial fund selection. They hadn't made any adjustments since, even though the markets had dramatically changed in the mean time.
To make matters worse, some of the advisors had Bill in the exact same funds. He should have paid a reduced or no commission on the some of the mutual funds he was buying. But, because the right hand didn't know what the left hand was doing, Bill wasn't given the advantage of the breakpoints he was entitled to.
All of Bill's advisors had one thing in common: sub-par performance. When you add up all the fees and commissions, including each fund's underlying internal management fees, Bill was paying 'prime rib' prices of 3% to 4% a year, and only receiving below average returns and cube steak service from his advisors. They weren't managing Bill's money. They were of the "set it and forget it" mentality. And Bill's wealth suffered as a result.
The same can be said about another investor I know. "Sam" had his money with a very large national investment firm. Sam was very impressed with the slick sales material they sent him, including a "free," and very professional, DVD. The salesman that followed up with a phone call was very persuasive, and Sam was glad to be investing his money was such a large and prestigious firm. Sam also liked that they were fee-based and he didn't have to pay any commissions.
Sam was promised customized strategies with superior results. But over time, he realized the performance he had hoped for wasn't materializing. He was paying 1.5% a year for average performance. His money wasn't being individually managed as initially promised, but lumped in a group with everyone else. At the beginning, Sam thought investing in a firm with $40 billion in assets was a good move. But in the end, he realized that he was getting lost in the shuffle and his nest egg was being put on ice.
These stories are not unique. The majority of investors are overpaying and receiving below-average performance and service. Next week I'll show you the right questions you must ask any potential advisor so you can get beyond the packaging and find out exactly what kind of steak they are really selling.
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