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Is Your Advisor Setting Strategy or Selling You Product? – The Financial Preserve from Lonier Financial Advisory LLC
Conscientious Financial Planning and Retirement Income Management | 201-741-9528
from Lonier Financial Advisory LLC, Osprey, FL

Is Your Advisor Setting Strategy or Selling You Product?

Is Your Advisor Setting Strategy or Selling You Product?

If you’ve participated over the years in company sponsored savings plans, you may have accumulated a sizeable savings in accounts sponsored by one or more employers. Though it may not have seemed like it at the time, saving the money is the easy part. Pick a few funds, check a few boxes, attend an occasional informational meeting, and a percentage of every paycheck is squirreled away, compounding over the years into what you have today. You may have gotten his far and have saved a good sum, without a financial advisor.

Now comes the harder part. With retirement nearing, what do you do with it? Surprisingly, for a big chunk of the financial services industry, that’s as tough a question for them as it is for you.

It’s relatively easy for big banks, brokerages and fund companies to scale up standardized portfolios and funds to capture the savings of millions of clients. It’s quite a different problem to determine the best way for each individual client to transform those funds into a safe income stream that will last throughout his or her retirement. Much easier to take a few portfolio products, lower the risk a tad, and recast them as “retirement solutions.” Trot out the idea that a 4% withdrawal rate will cover you. Sign here.

This may help them meet their goal of capturing your 401(k) rollover and increasing their fees and profits, but what about your goals? You don’t have the same balance sheet as the other 9,999 boomers turning 65 every day. Where’s the personal strategy that creates a secure lifetime income stream for you and your family?

Enter the Financial Advisor—Someone to Talk To
Many of you will look for an advisor to talk to about this, face-to-face, maybe for the first time. This is important stuff, and you don’t want to mess it up. So you talk to several, and soon become confused as each presses a different set of products as the right solution for you. The jargon is intimidating and confusing, the pros and cons hard to follow. You’re looking for a safe strategy for managing your money and making it last, and instead find yourself in the middle of a complicated sales process, surrounded by shiny financial products and a gaggle of advisors making conflicting claims pushing you to close.

Why is this happening? Aren’t advisors supposed to advise?

Financial planner and NYT blogger Carl Richards has observed, “Things get confusing when we have salespeople calling themselves advisers. I know of no other industry where it’s harder to figure out who does what. Everyone in the traditional financial services industry calls themselves an adviser, so you would think that means they are giving you advice that will be in your best interest. And sometimes they are. Other times, things aren’t so clear.”

There are over 900,000 “financial advisors” in America. They don’t all do the same thing, and, worse for the uninitiated, they aren’t even required to follow the same regulations.

Essentially there are two kinds of advisors, with two sets of rules, and, this being America, a third blended group who plays by both sets of rules.

The Sell-Side and The Suitability Standard
Plain vanilla financial advisors are usually registered representatives, ie, stockbrokers. They’re sales people, regulated by the Securities Exchange Act of 1934, overseen by FINRA, a self-regulatory organization, and bound to a suitability standard. Which means they aren’t supposed to sell you products that would be harmful or inappropriate to you, like an expensive variable annuity if you’re 95 years old and about to die. So they ask a few questions, try to determine your “risk tolerance,” and beyond that, you’re on your own, caveat emptor. Essentially, they are the seller of financial products, and you the buyer. In the trade, they work on the sell-side.

Advice on the sell-side is typically public and freely available buy/sell recommendations and ratings. If whispered and framed as coming directly from one of their smartest analysts, it sounds special.

The Retail Buy-Side and The Fiduciary Standard
On the other end of the spectrum are fee-only financial planners and investment advisers. Financial planners (CFPs, etc) are not regulated, though their certificates require them to uphold a code of ethics. Investment advisers are regulated by the Investment Advisers Act of 1940, overseen by the SEC or state agencies, and are bound to the fiduciary standard.

Fiduciaries are required to put your best interests ahead of their own, uphold a duty to loyalty and care, disclose fees, and avoid or disclose any conflicts of interest with your best interests. Typically this means you pay them directly for services rendered (fee-only), like your accountant and lawyer. Essentially, they provide planning, advice, and money management as a service, buying products on your behalf from the sell-side. In the trade, you and your fee-only advisors are the retail buy-side of the industry.

Advice on the buy-side is the “product,” so it is proprietary, private, paid, and personal.

Pure investment advisors usually charge a percentage fee (anywhere from .5% to 1.5% of assets annually) to manage your portfolio, so fiduciary standard aside, they like to capture as much of your funds as they can, and prefer solutions that keep your money under their management—a conflict they should disclose when relevant. For instance, when it would be in your best interest to purchase an income annuity for safe retirement income, lowering their amount of your assets under their management.

All things being equal, the sell-side sells products—securities, funds, and insurance investment products—and the buy-side provides prudent, personalized advice and planning so you buy the best products to fit your financial situation.

And Two In The Middle
Of course it’s not that simple. Banks and broker/dealers have long recognized there is a business in providing advice, especially since it can shade a purchase decision. So from the sell-side came dual-registered reps, and hybrid broker/dealer-investment adviser firms. 88% of all investment adviser reps are also registered sales reps of broker/dealers. That is, they have one foot on the sell-side and one foot on the buy-side, which makes for an awkward dance partner. One side of their brains thinks sales, while the other side of their brain is the impartial fiduciary. As long as they tell you they have two brains, it’s legal.

From the other end, many financial planners (CFPs, etc.) are also hybrid, dual-registered reps. That is, like the stockbrokers who moved over from the pure broker/dealer, they moved from a purely fiduciary role to one that allows them to sell the securities and insurance products that they build into your financial plan. As long as they disclose to you their compensation and the conflict of interest inherent in this role, it’s legal.

How It Adds Up
Of those 900,000 financial advisors, only about 34,000 of them act solely as fiduciaries—less than 4%. The joke is they’re the ones who are broke.

Here’s how it breaks down:

[list style=”orb” color=”green”]

  • 630,000 – Broker/dealer registered rep salespeople
  • 251,000 – Dual-registered sales reps/fiduciary investment adviser reps
  • 34,000 – Fiduciary investment advisor reps
  • 67,000 – Financial planners (CFPs), most of whom are either among the 34,000 fiduciary investment adviser reps or the 251,000 dual-registered sales reps/fiduciary investment adviser reps


Does being a hybrid who sells specific products shade the “impartial” recommendations the investment adviser makes for a portfolio or a financial planner makes for your plan? Maybe, maybe not. Regardless, many hybrid reps and planners do provide valuable, impartial, trustworthy services. Others, not so much. And of course, not every fee-only fiduciary acts only in your best interest, either.

Your Advisor—Selling Product or Setting Strategy?
We started this journey through the thicket of financial advisors looking for someone who puts personalized planning and strategy before product. Many, possibly the vast majority of the 900,000 advisors enumerated above, have more sales skills and product knowledge than planning skills, particularly the relatively rare mix of skills and knowledge needed for planning and managing secure retirement income. They are product oriented, and don’t have the time or ability to analyze your finances.

If your account is large enough, the big firms will have someone in the back office work up a “plan” for you that will show how the retirement solution de jour will work for you, no cost to you of course. Sometimes you get exactly what you pay for.

Look for advisor/planners who understand how to create secure retirement income strategies. Who have a comprehensive planning process that looks at your balance sheet, income sources, expected expenses, and liabilities, and calculates what you need for a secure lifetime income floor, and, based on the strength of your balance sheet, how best among the many options to secure it. At the end of the day, that kind of planning should be far more important to you than whether your advisor has one brain or two.

At some point we’ll come back to this topic, adding two more issues you should know more about, how product ‘religion’ (securities vs. insurance products) and advisor style (relationship manager vs. money manager) can impact the planning process and the recommendations you receive.

In the meantime, if you have any questions, or comments, please feel free to call, email, or comment below.

— Michael Lonier, RMA℠

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