posted on October 25th 2016 in LA/OC CFP Team Posts with 0 Comments /

What I Sell

I sell brainpower. That’s it. Clients bring me all kinds of questions, and I seek out answers.

Clients ask, “Can I afford a bigger house? Can I afford the house I’m in? Should I invest in this startup? What can we do about college expenses, or dad’s nursing home, or health insurance?”

Because I don’t sell real estate, or private equity, or mortgages, or insurance, I just answer the questions. It’s fun for me, because I’m helping people with real worries.

Best of all, my only incentive is to help my clients to achieve their best overall outcome. I am fully aligned with my clients’ best interests. So I sleep very well at night.

When it comes to investing money, which ultimately pays for all these things, it can get more complicated. Here again, it’s helpful to think about selling brainpower.

For example, do we want a tax-efficient, globally diversified, “smart beta” portfolio? Or do we want a more dynamic sector rotation strategy, perhaps using options for additional return?  Should we adjust your stock exposure based on economic and market conditions, as well as your personal situation? These are issues we think about for our clients.

The key is, I get paid the same amount no matter what is right for you. So I have no incentive to push you one way or another. That’s because I’m selling advice — brainpower — not a product.

So I sleep well at night. And my clients can, too.

New Rules…With Teeth

Many “financial advisors” are up in arms about new rules from the Department of Labor, taking effect in April 2017. These rules basically require advisors to more clearly respect the difference between being an advisor and being a salesman.

Advisors have to develop the very best advice and financial solutions they can. We can’t get away with “good enough.” Advisors have to meet a fiduciary standard.

Financial salesmen can sell you anything that isn’t overtly harmful. Let’s use food as an analogy. Financial salesmen can’t sell you poison, but they can sell you junk food and candy.  They don’t have to offer you the tastiest, most nutritious food, or a balanced diet. They have only a “suitability” standard.

Now more than ever, under new rules from the Department of Labor, salesmen can’t just call themselves advisors while quietly continuing to act like salesmen. (The rules apply only to IRAs and the like, not to all accounts, but it’s a start.)  

At WorthPointe, we welcome these new rules.

At other firms, a lot of advisors are suddenly lying awake at night. And here’s why. Some of them have obscured the distinction between when they’re advising clients, and when they’re selling a product.

Games People Play

Complexity creates ways for unethical operators to increase their compensation without highlighting conflicts of interest. Let me give you a few examples I have actually seen during my career.

1)   Hiding the markup. Let’s start with a gentleman who sells real estate investment partnerships. He attracts investors to buy, for example, a $40 million shopping center. But he doesn’t tell them he just bought it last month for $38 million, and he’s flipping it to them at a quick 5% profit.  

2)   Advising you to pay me a commission. How about a financial advisor who is also a real estate agent? That can be fine if clients ask him to handle unrelated transactions. But what if he advises clients to invest in rental real estate, and then helps them buy it? Can advice ever be truly impartial when it creates a commission for the advisor?

3)   Advising you to indirectly pay me a commission. Say Jim owns an advisory firm. Jim doesn’t sell life insurance, but his coworker does, and is licensed through an insurance agency Jim owns. So when Jim recommends more insurance to his client, and the coworker sells the policy, Jim collects part of the commission. Is this fully disclosed? Would the client ever notice this in the advisory firm’s regulatory filings?    

4)   Paying your attorney part of my commission if he endorses what I sell. I knew an insurance agent who sold extremely large life insurance policies, proposing to reduce clients’ estate taxes. To increase the credibility of the “innovative” strategy he created, he paid a top tax attorney to provide a favorable tax opinion letter to prospective clients. And the agent prepaid huge legal fees, ostensibly for defending the client against any future challenge by the IRS. But the attorney’s upfront fee was far higher than any conceivable cost of future legal representation. And the attorney got paid only if the insurance was purchased. Was the attorney truly being paid for his expert legal and tax opinions, or instead for helping to sell huge life insurance policies (without being licensed to do so)?    

5)   Selling you a function of your own assets, at whatever price I choose. Here’s my personal favorite. The sole owner of an advisory firm decided that a number of his clients should invest in small, privately held businesses. So he formed a new entity, which he controlled, to gather and invest their funds. Then he sold part of his own investment advisory firm to this new entity! How could he possibly negotiate fairly with himself to set the price? And isn’t the value of the advisory firm a function of the clients’ own money? This one makes my head spin.

Many of these people had good intentions. They probably wanted their clients to prosper.  But, in my opinion, they let their own desire to prosper lead them away from simple, clear business models with minimal conflicts of interest.

Are They All Players?

By this point you may be shaking your head, saying, “I knew it! Financial advisors are all crooks! You can’t trust any of them.” It sure feels that way sometimes. But that’s too broad a statement.

Many financial advisors have carefully stayed away from situations like those described above. Here at WorthPointe, avoiding conflicts of interest is part of our collective DNA. Of course, we hope people will hire us and pay for our advice. But we make it pretty clear that’s all we sell: advice.

How To Sleep Well At Night

If you haven’t hired a financial advisor yet, there are easy ways to quickly narrow your search.

1)   Look for the right kind of financial advisor from the start. I recommend fee-only advisors who meet the stringent requirements for NAPFA membership. (Yes, we at WorthPointe are members.) Be careful; the phrase “fee-based” means “fee and commission,” and could introduce conflicts of interest. “Fee-only” means the advisor receives only fees, and that’s the best model in my opinion.

2)   Ask questions! Read the documents you are given. Read the firm’s regulatory filings, even if they’re offered but not handed to you.  Ask for them. Get explanations.  Think it through.

3)   Avoid advisors who also have something to sell. In my opinion, the best advisors just sell advice. If you need a life insurance policy, an impartial advisor should recommend a specialist in that kind of policy, but shouldn’t get a commission or kickback for the referral. You get the idea.

4)   Check out any conflicts. If it seems like there could be a conflict, consider the consequences to you. Ask trusted friends or other advisors for their opinions. Ask the advisor, sure. But also ask around.

5)   Avoid “private placements” where you can’t look up the daily market value online, showing prices for real, day-to-day transactions. Your money should be held by a brokerage firm, or another third-party custodian, not your advisor. Avoid investing directly in entities that send you their own “valuation.”

Want to learn more? Download this brief guide to Eight Critical Questions you should get answered before hiring a financial advisor.

And next time someone gives you financial advice or recommendations, think about what their motivation might be.

If you hire the right financial advisor, you too can sleep well at night.
I know I do. And my clients can, too.  

about the author: WorthPointe Wealth Management

Continue Reading

Other articles filed under LA/OC CFP Team Posts

Property Tax Savings for California Seniors (55+)

September 25, 2017 - You may not consider your 55th birthday as a milestone, however, there may be more reason to celebrate than you think. At the age of 55, several options for tax savings become available for those considering selling and repurchasing real...
Continue Reading

Video: FinTech and the Human Touch

April 5, 2017 - [embed]https://www.youtube.com/watch?v=GfTqvWEckck[/embed] WorthPointe is a progressive firm. What makes us different is using the latest financial technology to augment our attentive advisors, not replace them. Watch San Diego Financial Planner Ken Cortlett, CFP® talk tech.
Continue Reading

The Future is Now

March 29, 2017 - Many people focus on how much money they need to accumulate so they can stop working. The question then becomes, “How do I get there?” Most of us contribute to a 401(k) at work, but often just enough to capture...
Continue Reading

Managing Anxiety in Uncertain Economic Times

March 15, 2017 - [embed]https://www.youtube.com/watch?v=0IQETUmePXM[/embed] A 24-hour news cycle means that it’s easy to catch up in the day-to-day flux of the financial world. WorthPointe Partner and San Diego Financial Planner, Ken Cortlett, CFP® reminds investors to stay focused on our individual long-term plans.
Continue Reading

Orange County Homeowners’ Tax Withholding Insider Tips

March 8, 2017 - If you haven’t read my last two posts about filling out withholding forms and justifying low withholding, please take a look! Next up, I’d like to share some insider tips to make tax withholding work for you, especially if you...
Continue Reading

Return to Blog Home