Happy Halloween: What Costume is Your Financial Advisor Wearing?

Happy Halloween! The following article was published last year but it's as scary as ever...Be safe out there! 

It’s probably been at least a good two to three months that each of my kids knew exactly what they were going to dress up as tonight. It’s not even that much of a stretch to say I’ve probably heard what they will be next year as well! For many children this is a big deal…and I believe Halloween goes beyond just the mad evening hunt for candy. It’s an event that retailers are keenly aware of and prepare for. In a sense it also truly seems to kick off the string of holidays that are fast approaching us this time of year.

As it relates to the economy Halloween itself is often a precursor to what many use in forecasting retail sales; Black Monday. Halloween sales have trended upwards for the past few years and 2012 looks to be the strongest ever with the average person spending almost $80 each. According to the National Retail Federation about 71.5% of America plans on celebrating in some fashion; whether it is in costumes, decorations, or simply handing out candy to happy little faces. So, what does all this have to do with financial advisors?

Well…like many parents of younger children I was asked what I’m going to dress up as. I always joke with friends that I’m going to wear my usual costume of a tired middle-aged business owner. Aside from receiving a courtesy chuckle it simply means that I’ll be chasing two kids in the dark after a day of work. Once we return home I get to see my wife find a way to let them choose a few favorite candies and then make them all magically disappear! But what is my real costume this year?

I’m a big fan of “looking under the hood”; whether that is in regard to a car, a portfolio, or in this case… What’s behind a person’s exterior and what makes them really tick? I firmly believe that we all find ourselves in certain careers for a reason. Sure, there are “unexpected” turns in the road but somehow there are driving factors that help folks land in their respective jobs. What made you choose your career? Why do you think your financial advisor chose his or her path to this industry?

In my opinion it’s sometimes “Halloween scary” to learn why certain folks chose the financial services industry. Did they have an affinity to numbers? Is there some underlying passion to help build retirement plans? Did they stay awake at night trying to dissect the ‘Black Scholes Model’? Was their childhood idol the Nobel Prize winning economist Harry Markowitz? Not likely…

The reality is that in most cases it’s due to the perception that there is a lot of money to be made. Many current day financial advisors weren’t even licensed when the movie Wall Street came out. Perhaps the images of Gordon Gecko (Michael Douglas) with his power ties and cuff links helped drive them to chase that dream. Sadly enough, many insurance salesmen are dressed up as financial advisors or even estate planners. Don’t get me wrong…insurance has a place in most every financial picture but it’s how it’s presented and offered that makes a difference. Did you buy your insurance or was it sold to you? I think you get the point but my main question is to understand, connect, and flush out why your advisor is where they are and what truly is “underneath their hood/costume”?

My business partner, Matt Blake, often shared with me how he was basically born to be in this industry. Growing up in the small Colorado town of Evergreen, his father was a stockbroker and his grandparents were both successful entrepreneurs so he was surrounded by business. He actually ventured into other industries but his strengths and passion continually brought him back to the financial services industry. Throughout his career he has attempted to redefine the industry and bring a higher level of service than clients are used to typically receiving. While he has a variety of experience in the financial services industry and has been forced to wear many different “costumes”, he embraces the fact that he is driven to serve his clients. Simply put… to truly be successful and happy you do what you really know well and what you love.

Personally, I grew up as a child of a World War II veteran who was much older than most fathers in my neighborhood. He was born in 1925 in Cleveland, OH during the Great Depression and some of the stories he told were hard for me to digest as a child. It wasn’t until I was older that I was able to fully “connect all the dots”. All those lessons of cleaning my plate weren’t just to grow “big and strong”…they were stories of appreciating what you have and understanding that it may not be there tomorrow. In 1987, when I declared that I knew I wanted to be doing something in the investment field, I was told to “find something else”. Do something that relies on a tangible good…like real estate. You can touch it, build it, and change it. To some in that generation, investments were fleeting promises that could vanish in an instant…so “stay away”. Sometimes I see these newer generations (Gen X and Gen Y; the Millennium generation) taking on similar mindsets due to some of the recent financial disasters. Ironically enough though, both of these younger generations have started saving for their retirements almost a decade earlier on average than their Baby Boomer parents.

Once you understand what’s under the typical financial advisor costume…ask yourself what is under the costume of your actual portfolio? Understanding who built it for you will clearly help you see what the portfolio is really all about. If your investment advisor is dressed up as someone who works at a large brokerage or wirehouse you are dealing with someone who is typically paid on commission. There are four large national firms remaining with names you may still recognize: Morgan Stanley Smith Barney, Bank of America’s Merrill Lynch, Wells Fargo Advisors, and UBS.

If your advisor is at a bank you can almost be assured that your portfolio is largely positioned in proprietary and high fee products. Banks are smart in that they know most people feel less intimidated and have their “safe” money sitting in a savings or checking account. Some investors still hunt for extra yield via CD’s but if you’ve been awake for the past few years you’ll know that the return on CD’s or money markets is about “zero point nothing” percent. Banks love to cross-sell and therefore attempt to keep the money “sticky”. If a client has a checking account/bill pay service, maybe a mortgage, and then investments…they’re all likelier to stay. The problem for the investor though is that they also have limited choices and most bank employees are not all that sophisticated when it comes to investment knowledge.

Another seemingly less threatening place for the investor to seek help may be at a discount brokerage like Charles Schwab, TD Ameritrade, Vanguard, Fidelity, Scottrade , or ETrade. If you’re truly a self-directed investor and actually know what you’re doing, then these are fine venues to park some of your money. Realistically though, several of these firms will pitch you offerings that are either very boilerplate or simply outsource you to an advisor where they often receive and/or share a fee. The alternative is an “in-house” solution that may not be as sophisticated as you are led to believe. Charles Schwab, for example, offers their Schwab Private Client service to clients with assets over $500,000. They charge clients 0.75% but basically put the client in a fairly mundane model that is not actively monitored but rather farmed out to a team in a call center. This is not so much a “wolf in a sheep costume” but you hopefully can see the potential conflict of interest or certainly the incentive for a discount brokerage representative to push you into a ‘solution’.

There are also a handful of more regional firms such as Raymond James, Ameriprise Financial, or even your local Edward Jones type office. What you’ll almost always find here is someone who is pushing annuities/insurance products and loaded mutual funds. Again…understanding how people are compensated and the structure or platform they operate under is critical to how your portfolio is built.

Some investors that have strayed from these more traditional venues for investment advice have gone to “independent broker dealer” offerings like LPL. Under this arrangement you have someone who is basically a contractor under a commission or fee-based structure as well and you will typically be put into loaded products or platforms that cost well above 1.5% after all fees, costs, and expenses are tallied.

The only option or “costume” in this Halloween case…that has a “fiduciary duty” is the Registered Investment Advisor (RIA). A fiduciary duty is an obligation to provide proper investment advice and always act in the best interest of the client. One would think this is the case for all of the above firms and platforms that I’ve described. This is perhaps one of the biggest and most critical misperceptions out there. All the other platforms and firms I reference above are simply held to a “suitability standard” which just means the investment must be “suitable” to the client at the time of purchase. By definition, and in all reality, this is simply a lower standard than that of an RIA. People’s situations change all the time. What was a “suitable” investment last year could be drastically disconnected to an investor’s situation this year and only the RIA would have a legal and fiduciary duty to make appropriate changes and recommendations.

That’s the costume we wear at My Portfolio Guide; the RIA outfit.

Only by having worked at some other firms over the past 15 years were we able to learn what really is behind those other costumes. Tonight, we’ll walk the streets of our neighborhoods with the same outfit from last Halloween. Our kids may not think it’s very exciting or different than last year…but you know what???

This costume is ethical, fair, and it allows us and our clients to sleep well at night knowing that we are doing the right thing; inside and out.