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There's nothing better than a hot and juicy steak, especially one
from your own grill. But, can you imagine going to the grocery store
to pick up a few prime ribs, only to get home and realize you ended
up with cube steak instead? Talk about injustice! Of course, this
doesn't happen to most of us, because grocery stores package their
meat in clear plastic wrap, so we can see exactly what we're buying.
If only we bought financial services the same way.
True transparency is sorely lacking in an industry that packages
itself with imposing-sounding credentials, slick advertising and
carefully orchestrated seminars. Many investors are convinced they
are receiving the "prime rib" service they're paying for, without
realizing all they're getting is some chewy cube steak.
That was the case with "Bill," an investor I talked with recently.
Bill had two million dollars in investable assets and was using a
number of different advisor services to manage his wealth. Some of
them were commission-based while one was fee-based. But, all of them
were using mutual funds exclusively, and none of them were aware of
Bill's total financial picture.
The firms that Bill was using were very professional sounding and
had nice offices. Their credentials were good and they were
obviously successful (at least in gathering new clients). Each had
convinced Bill to trust them with hundreds of thousands of his
hard-earned dollars and invest in their "unique" strategies.
The problem was their strategies weren't that unique. They were
basically just splitting Bill's money between different mutual
funds. One commissioned advisor convinced Bill to also use a timing
service to get in and out of the mutual funds he had at his firm.
Bill had to pay dearly, with a 3% commission on the initial
investment, then an additional 2% a year just for the timing
service.
The other advisors' fees weren't much better. One, a local franchise
of a national mutual fund supplier, charged 1% per year. But all
they had done was help Bill with the initial fund selection. They
hadn't made any adjustments since, even though the markets had
dramatically changed in the mean time.
To make matters worse, some of the advisors had Bill in the exact
same funds. He should have paid a reduced or no commission on the
some of the mutual funds he was buying. But, because the right hand
didn't know what the left hand was doing, Bill wasn't given the
advantage of the breakpoints he was entitled to.
All of Bill's advisors had one thing in common: sub-par performance.
When you add up all the fees and commissions, including each fund's
underlying internal management fees, Bill was paying 'prime rib'
prices of 3% to 4% a year, and only receiving below average returns
and cube steak service from his advisors. They weren't managing
Bill's money. They were of the "set it and forget it" mentality. And
Bill's wealth suffered as a result.
The same can be said about another investor I know. "Sam" had his
money with a very large national investment firm. Sam was very
impressed with the slick sales material they sent him, including a
"free," and very professional, DVD. The salesman that followed up
with a phone call was very persuasive, and Sam was glad to be
investing his money was such a large and prestigious firm. Sam also
liked that they were fee-based and he didn't have to pay any
commissions.
Sam was promised customized strategies with superior results. But
over time, he realized the performance he had hoped for wasn't
materializing. He was paying 1.5% a year for average performance.
His money wasn't being individually managed as initially promised,
but lumped in a group with everyone else. At the beginning, Sam
thought investing in a firm with $40 billion in assets was a good
move. But in the end, he realized that he was getting lost in the
shuffle and his nest egg was being put on ice.
These stories are not unique. The majority of investors are
overpaying and receiving below-average performance and service. Next
week I'll show you the right questions you must ask any potential
advisor so you can get beyond the packaging and find out exactly
what kind of steak they are really selling.
Continue reading with Part Two.
In addition to being a
nationally syndicated columnist and Certified Financial Planning
Practitioner, Mr. Voudrie provides personal, private money
management services to clients nationwide. Read more
articles about finances
or investing, or
ask Jeff
financial question. |
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