It's A Zoo Out There For Investment Advice

John Reeves Motley Fool May 12, 2012

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By John Reeves | More Articles May 11, 2012 | Comments (15)

It seems like there isn't much that all Americans agree on these days, but there's this: 92% of us believe in God and 97% think that financial advisors should be held to a "fiduciary standard."

We'll save the talk about the Big Guy upstairs for another venue. But as for financial advisors, nearly every American thinks that they should be held to a standard that requires them to put their customers' interests ahead of theirs, and be upfront about fees, commissions, or conflicts of interest that might influence their advice.

Given our near-unanimity about the importance of the "fiduciary standard," it's pretty depressing to learn that 76% of investors, according to a comprehensive study, are actually wrong "in believing that 'financial advisors' -- a term used by brokerage firms to describe their salespeople -- are held to a fiduciary standard." Clearly, Americans are not getting what they want when it comes to financial advice.

It's a zoo out thereThe truth is that most Americans, alas, don't have a clue about how the financial advice industry functions. And it's not entirely our fault, either, though all of us definitely deserve some of the blame. In Josh Brown's outstanding new book Backstage Wall Street, he provides the following quote from an industry observer:

"It's a zoo out there -- stockbroker, investment advisor, financial planner, wealth manager, life planner, retirement specialist, these are just a few of the terms investment professionals use to describe themselves. There are so many different breeds of investing professional today and what an investing professional does for the client has changed so much in the past decade, that few investors are clear about who does what in the new landscape or what legal responsibilities these professionals have to their clients."

As you might expect, this ignorance often leads to bad outcomes for ordinary investors. In addition to being unclear about who is who, and who is expected to do what, investors are often hazy about commissions, fees, and other hidden expenses. In one of the articles in this special report on the financial advice industry, Motley Fool analyst Matt Koppenheffer will show you how exorbitant fees can do serious damage to your portfolio.

It's your moneyWe've put together this series of articles in order to help you find the best possible advice for protecting and growing your wealth. Our aim has been to shed light on complex issues like advisor compensation and performance, while also providing you with helpful tips for finding and evaluating a financial professional. As we put this package together, we were guided by the following loosely held beliefs:

1. Most individuals would probably benefit from financial adviceYes, it's true. Saving and investing is complicated, and most of us need help making decisions on asset allocation, diversification, and retirement vehicles, to name just a few challenges. The experts we talked with agreed that financial advice can be invaluable for many investors.

Carl Richards, a New York Times contributor and author of the Behavior Gap, told us that unless you see "Warren Buffett in the mirror," you may want someone to help you. And Brown wrote in his book that "the great majority of what we'll call 'ordinary' people would be better off getting some help." Even Burton Malkiel, the Wall Street skeptic and efficient-market high priest, has become more appreciative of what financial advisors can do. He said recently that they can keep "people from beating themselves" and "on an even keel."

2. There are good financial professionals and bad onesRemember, it's a zoo out there. Some folks call themselves "financial advisors" but they are really stockbrokers who make their living off commissions from selling you as many financial products as they possibly can. On the other hand, there are fee-only, independent investment advisors who are held to a fiduciary standard. In our series, we aim to help you make sense of all of these designations and requirements.

Never forget, either, that human nature complicates things still further. There are no doubt outstanding individuals, of sterling character, working as brokers. There are a few dodgy independent investment advisors out there as well. All professions have their bad apples.

3. You're the boss when it comes to your wealthThis last one may be the most important principle of all in investing. Each of us has our own needs and psychology, so there just isn't a one-size-fits-all plan out there. Anyone who tells you otherwise doesn't know what they're talking about.

Richards really drove that point home to us when he said that solid investment decisions can only be made within the context of a good financial plan that takes into account your life goals. Only you know what you want to achieve in the future, so make sure your financial advice is tailored to fit your circumstances.

The great Ralph Waldo Emerson, in his classic essay Self-Reliance, said, "Nothing can bring you peace but yourself. Nothing can bring you peace but the triumph of principles." Those are wise words to live by. And they're pretty helpful, too, when it comes to financial advice. We hope our series will help you take control of your financial future.

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John Reeves does not own shares in any of the companies mentioned in the article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (15) | Recommend This Article (34) Recommended 34 Times

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment icon found on every comment.

Report this Comment On May 11, 2012, at 5:03 PM, TMFJoeInvestor wrote:

Awesome stuff, John and friends! Fool on!

Report this Comment On May 11, 2012, at 5:09 PM, pennstater2005 wrote:

I dropped my financial advisor got a low expense ratio from Vanguard and escaped all those commission fees as well. Each stock I bought cost $75 plus a $4.95 processing fee. Now it's only $7 to buy or sell. I wish I would've done it ten years ago. With resources like The Motley Fool and others like it I believe anyone can invest on their own as long as you are willing to take time and care to research your decisions.

Report this Comment On May 11, 2012, at 5:14 PM, topbeancounter wrote:

well written article....

Report this Comment On May 11, 2012, at 5:18 PM, AlanLee49 wrote:

I think the article itself is well balanced however the point made about most folks benefitting from an FA or FP I believe not to be true.

I believe that one who does some homework, and learns the basics can do just as well and save the fees. The "pros" are much more concerned with their bank account, which is only natural I suppose. Much like insurance companies that offer annuities relying on investors fears and lack of knowledge to sell their product, advisors take a much similar approach unfortunately.

With the tools on the internet, and the free services offered by the likes of Fidelity Investments, there should not be a problem for anyone who wants to find the information needed, to find it.

It is all right here on the internet, everything, for free.....just use it.

Report this Comment On May 11, 2012, at 5:21 PM, mikecart1 wrote:

I dropped my financial advisor early on when I knew nothing about the market and my bank account was puny. After realizing I was paying him $500/year for his 'mastery of the stock market' and $20-30 in commission on every trade within the worthless selection of mutual funds and etf's, and realizing with simple math I was not even breaking even with all these expenses, and realizing that he did not take me serious when I said I wanted to be at a certain point by the time I was 30, and me realizing that there was no way at this pace I would ever reach that point if I lived to age 100, and realizing that he knew less about the stock market than me, I dropped him the day after we had a nice pleasant coffee lunch to discuss the upcoming year and all the great things that would happen.

Great things alright:

-Day 1 - Got my $500 back for the upcoming year

-Days 1-7 - Phone calls around the clock I never answered asking me what was wrong

-Day 30 - Moving what money I had left into where I wanted it

-Day 365 - Doubled my net worth

-Day 1000 - Quadrupled my net worth

-Today - Money ain't an issue

Fail fast, succeed sooner is the motto to follow if you want to create your own lotto in the world of tomorrow! :)

Report this Comment On May 11, 2012, at 5:44 PM, bevevino wrote:

I use an advisor for part of my portfolio and manage another portion myself. I use several principles.

1. The Advisor is not the custodian of my money. The controls a managed account which resides with my broker, creating a firewall against embezzlement,

2. Advisor fees are not dependent on transactions. I pay a percentage of the portfolio under management, so there is no incentive to churn. It does incent increasing the value of my portfolio.

3. I reserve the right to not have instruments purchased that I do not approve of. I will not use an Advisor who refuses all input.

4. I ask the Advisor the rationale for decisions and expect a lucid explanation.

5. I expect the Advisor to beat the market most of the time, in both up and down markets. I dismissed and Advisor who did well in an up market, but refused to sell or modify the portfolio when the market tanked.

Report this Comment On May 11, 2012, at 5:46 PM, jc09058 wrote:

very true and well written.

Report this Comment On May 11, 2012, at 6:02 PM, Notfooled1 wrote:

Using THE MOTLEY FOOL as your adviser may be hazardous to your financial health.

Report this Comment On May 11, 2012, at 6:08 PM, RetiredExCPA wrote:

I think pennstater2005 hit the nail on the head. I have recommended Vanguard to many former clients.

Report this Comment On May 11, 2012, at 9:34 PM, 80andwise wrote:

Thwart financial advisors - learn to do-it-yourself.

Every minute you spend educating yourself will pay back in thousands of dollars.

Use Vanguard for everything, because expenses add up, and compound, and they are better in your pocket.

You will make mistakes, but so will they. Why pay them to lose money for you.

I started at 55. I'm a math dyslestic! but a calculator cures that. I now enjoy a comfortable retirement - you can too!

Report this Comment On May 11, 2012, at 11:15 PM, TMFBane wrote:

Thanks for all of the great comments, everyone! It's really nice to hear everyone's personal experiences. And it's also very encouraging to learn that some of you have had success going it alone.

Report this Comment On May 12, 2012, at 12:45 AM, Synchronism wrote:

@ bevevino:

Agree with everything but your fifth item. Firing someone on that basis alone during a down market can crystallize your losses and preclude your portfolio from market recoveries -- opportunity costs are pretty high.

Averaging down has been a very lucrative tactic for me in my experience, but only when: (1) you're not trigger-happy on low-damage market strikes, and (2) you screen and research thoroughly to avoid value traps. :)

Report this Comment On May 12, 2012, at 12:45 AM, KKoleto wrote:

Never had a financial advisor. Don't beleive in them. Get a good CFP for direction, then manage your own $$$.

Ken,Fool

Report this Comment On May 12, 2012, at 5:29 AM, simbaMkubwa wrote:

I'm from the UK and consulted a 'financial advisor' who was a member of a professional body.

Turns out that she was nothing more than an independent slaesperson selling policies/investments that yielded her the best commisions.

My interests could not be further from her interests.

Needles to say she got dumped and I've never consulted an IFA since.

Report this Comment On May 12, 2012, at 6:25 AM, TripleLindy wrote:

The majority of 'financial advisors' are simply salespeople, selling financial products. No different than used car sales people, just selling a different product. Insanely overpaid for the 'value' they (don't) create. When the market is up, it is 'see how great I am', and when the market is down, it is 'well, the market is down, and so is every one else'. They can't lose! Then then espouse the virtue of tax losses - like they did you a favor! Snake oil salesment of the 21st century.

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