My husband and I recently interviewed various financial advisors in an effort to find someone who could help our growing family make better investment decisions. I expected to love one more than the other and to be proof of our decision, but we did not get to this point. Both advisers have given us different investment strategies we left behind in our offices simply wondering how strategies can be very different. How does a financial advisor decide what is the best path for the family? The routes we were given were very different, and I can not imagine they would get us where we wanted to go.
Every day almost every afternoon from September to February, I sit in my favorite chair and watch professional football.
My favorite part of the game is to analyze why the middle player decides to do what he does. Why throw it at one man, when the other man is more clearly visible too. Why has the ball passed, when running is more logical? The real sport I’m talking about here is as old as the football game itself: a quarter of the back seat of the arms. From the comfort of my home, with my beer in, I feel that I am somehow qualified to guess the best athletes in the world, primarily because I have not been followed by men of the size of late Volkswagen.
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With all due respect to the financial advisors of all kinds, Tara, I will spend a few hundred words that try to help you understand how professionals seem to be smart to come up with two completely different proposals.
I will never forget my first month as a financial advisor in the summer of 2000. I was 22 years old, eager to help others, and thirst to learn more about financial advice. “If someone needs an individual retirement account (IRA), that’s what we use to accomplish that,” said my coach. It makes sense to me. what did you know? For six months I began to do exactly what they told me. But I realized that I was not only using the product that urged me to use it, but the investments I really wanted to use were not available to me.
Three really complex ideas can be drawn from this example. First, a good-faith counselor can informlessly offer sub-expert advice because he simply does not have enough experience. Second, a good-faith counselor can provide unbiased advice superficially because his company does not provide them with access to investments or financial products that would allow them to serve their clients better. Thirdly, even if an adviser can offer any product or process they want, it is simply their opinion.
These points seem obvious, but when you are at the moment, feel the heat to make a decision, it is difficult to remember what affects the thoughts of your counselor. Just like professional football, your partner’s decisions seem clearer when you sit in your chair, unlike the chair in his office.
There is also another simple explanation as to why different advisors have offered different advice. Good personal preference ole. I love creamy peanut butter and my friend Gary loves crunchy. Do you think this makes my neighbor ignorant? Of course I do. But that does not make him a bad person. Some financial advisors prefer individual stocks, while others prefer exchange-traded funds (ETFs) and some prefer insurance-based solutions (such as annual premiums or life insurance). All these solutions have different fees, different benefits, and different compensation for the counselor.
I’ll be offended if I do not get compensation. Yes, some financial advisors will be affected by the amount of compensation they receive against their recommendations. Generally this discussion slips its way to a return versus a return versus a fee-for-fee fee.
To make this more complicated, while the insurance-based solution may result in more immediate compensation to the counselor than the non-insurance-based solution, over time, other solutions can compensate a consultant well if the investments are based on fee calculations. Simply put, I do not think compensation alone tells us enough about the motives or preferences of the counselor.
Back to Football. Why does the same back player cast on the same recipient over and over again? Because he has already received positive results from doing so. But in the end this habit will create big problems. Your team may cost a downhill or a game or even a season. Financial advisers are not different.
They may go back to the well to get the same solution over and over again, although the solution may not apply to your own situation. When you are a financial advisor, your goal is to focus on whether your solution really conflicts with your life, risk tolerance, and general comfort.