Money Magazine has a feature each month called The Mole, which is a column written by an anonymous financial planner. I’m not exactly sure why he’s anonymous unless he’s scared of colleagues harrassing him. Regardless, it’s usually an entertaining column and this month’s column is no different:
I’ve never met a financial planner who didn’t claim to put his client first.
Take this colleague I dealt with recently. On his Web site you’ll find him saying things like “My client’s interests come first” and “I recommend products based on what’s in their best interests and not based on which one would give me more earnings.”
This same planner sold his 60-year-old client seven expensive variable annuities, which made up the vast majority of her portfolio when she came to me for advice.
He even put her Roth IRA in a variable annuity, which is paying for tax deferral within a tax-free vehicle. He sold her so many “income guarantees” that he drained her portfolio of more than $20,000 annually.
Bottom line: just because a planner (or ANYONE you do business with for that matter) tells you that they put your needs ahead of their own, doesn’t mean they do! It’s still your responsibility to know whether or not you are being taken advantage of. The Mole even offers up four suggestions to help you protect yourself:
1. Always ask your planner to estimate your total costs and what benefit you are getting for it.
2. Ask if there is an alternative way to meet your goals that lets you keep more of your money.
3. Get the planner to put the above two answers in writing. If he won’t, ask yourself why.
4. Always know what you are buying. As a general rule, the more complex it is, the worse it is for you.
I believe whole-heartedly with number 4! Seriously, I can’t imagine any honest planner (whether commission-based, fee-based, or fee-only) ducking those questions. I liken to when I take my car in for repairs. I want to know how much it is going to cost BEFORE the repairs are done. If the mechanic can’t tell me that or refuses to tell me that, I’ll take my car somewhere else. It should be the same way in the financial services business.