Why Being Friends With Your Broker Could Cost You Money

The following is a guest post by Dennis Notchick. Dennis is a Registered Investment Advisor Representative and Certified Financial Planner with Safeguard Investment Advisory Group in San Diego, Calif. He has nearly a decade of experience as a financial professional.

A Trusting Relationship

Building a trusting relationship with a financial professional is important because you’ll be sharing information about your assets and income, and you’ll want to feel confident when acting on any advice you receive. But be wary of becoming too close, says Dennis.

“People often become good friends with a broker who’s not doing a very good job for them,” Dennis says. “Even when they begin to realize they aren’t getting their money’s worth, they can’t bring themselves to break the ties. The personal relationship has come to mean more to them than their bottom line.”

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Dennis recalls once when a couple in their 60s came to him to discuss whether there were better options for their money. Based on their financial professional’s advice, they had invested $1 million in variable annuities.

“Variable annuities can be very expensive,” Dennis says. “The fees can range from 3 to 4 percent per year, so I pointed out to the couple that they were being charged exorbitant fees and could reduce $30,000 or more in costs.

“The husband was on board and ready to make a change, but the wife was hesitant. She didn’t want to jeopardize that friendly relationship they had with their broker. They decided to stay where they were, paying over $30,000 in fees each year, just because they want to keep that friendship.”

So what should people do when they want to find an advisor they can trust, but don’t want to go overboard with the relationship?

Ask Three Questions

For starters, Notchick suggests they ask these questions:

  • Is the advisor a fiduciary? The fiduciary standard says that the financial professional must always act in a client’s best interest. Many advisors, at least right now, are held to a lesser standard. Their advice only needs to be generally suitable for the client, which allows these professionals to steer clients to investment products that are more profitable for the advisor. Beginning in January 2018, a new U.S. Department of Labor rule will be in full effect and require that all financial professionals meet the fiduciary standard when providing retirement advice. Some brokers call themselves fiduciaries – but how can you tell which hat they are wearing when giving you that advice?
  • What licenses does the advisor have? If an advisor only has a securities license, then you will only receive securities-related advice.  If an advisor has an insurance license, you will only receive insurance-related advice.  Make sure you work with an advisor who understands both worlds and creates a plan based on the client’s philosophy, not someone else’s.
  • What’s the advisor’s experience? It’s worth knowing not only how long the advisor has been in the business, but more importantly what kind of training and experience he or she has. For example, Notchick says, those who earn the Certified Financial Planner designation must go through extensive training and pass a rigorous exam, but real world knowledge/experience of all the areas of financial planning are also critical.

Final Thoughts

“Certainly, it’s important to have an advisor you can trust, but you still want to keep the relationship professional,” Notchick says. “When that relationship becomes more like a friendship, high fees almost always mean the investor will pay the price.”

 

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

4 Comments

  1. If I had to pay someone $30k+ every year to be a friend, that’s not really a friend I would want. And clearly, the broker doesn’t care about you as much as you care about them. Half of your average earnings going to fees, not to mention stock market flat lines for a year or two and you’re still out $30 to $40k every year.
    That said, I did once awkwardly duck a full life insurance guy when I should’ve flat out told him his advice was horrible and I wasn’t interested.

    • As I noted in my response to Josh, when dealing with your money, particularly when we’re talking about financial security or not in retirement, it definitely behooves the individual to pay attention to the numbers and cold, hard facts. What’s that saying about a fool and his money …

  2. The reason why people getting too close to their broker or even having a personal relationship with their broker is that the very act of creating a personal relationship introduces emotion into the equation.

    Finances are an area that simply can’t involve emotions in it’s calculations and the moment you do you’re bound to make a bad decision. Stick to the cold, hard math when you’re dealing with money!

    (I guess charity could be an exception, but the amount you’re donating should still be a cold, hard math decision!)

    • ” … introduces emotion into the equation.” Great, great point. When dealing with money, particularly when we’re talking about financial security or not in retirement, it behooves the investor to pay attention to the numbers and cold, hard facts.

      Thanks for stopping by and sharing your thoughts, my friend.

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