The business of providing financial planning and investment management can be very hard to understand for the common investor. Whether it is deciphering the goals of your advisor or understanding how much or what you are paying for. Here are a few items that your advisor does not want you to know.

  1. There is no such thing as a free lunch. While it is always nice to feel as though you are getting something for free this is the last thing you want when it comes to your personal finances. If your advisor is not charging you for their time then they are going to make their nut somewhere else, product sales. Products that you need to be aware of are loaded mutual funds, REITs, annuities, and insurance. These products tend to have large commissions or fees. Ask your advisor how they get compensated, you need to (and deserve) to know. If they cannot provide a clear answer you need to find another advisor. If you work with an IAR they must disclose all material conflicts of interest.
  2. Your mutual fund portfolio will more than likely underperform the index it tracks. In 2014 86.44% large-cap fund managers underperformed the benchmark (according to S&P Dow Jones Indicies year-end 2014 SPIVA U.S. Scorecard). Knowing this, what reason is there to be in these funds? Your advisor likes these funds because they get paid regardless of performance. If you are trying to track an index you should just invest your money in an index ETF such as the SPY. Doing so will greatly reduce your initial and ongoing expenses to have your monies invested.
  3. They have a quota and they are using you to hit their goals and keep their job or validate their expense. Whether it be the number of accounts opened, number of transactions, or they types of products sold there is a quota and their “advice” is tailored to help them hit their goal, not provide the best solution for you. The only way to remove this peril is to work with a fiduciary that must disclose all material conflicts of interest. As a registered investment advisor we do not have quotas.
  4. They did nothing more than input variables into a software to build your financial plan. It is a matter of efficiency so they can go find more sales. True financial plans take time and knowledge that most people that call themselves advisors do not have. There are an abundance of firms that charge $3,000 plus to input data and generate a cookie cutter report. At Lanier Financial Group, our financial plans are custom made and take anywhere from 5-20 hours of upfront work to develop while majority of the software solutions available take 30 minutes to input data and spit out a report.
  5. Your mutual fund portfolio is over-diversified, has overlapping positions, is expensive, and provides you very little control. When the number of your actual underlying investments gets above 50 the benefit of risk diversification is somewhat limited. Additionally the more mutual funds you own the higher the chance that you have overlapping positions. Most mutual funds have well over 100 holdings and according to Morningstar in 2013 the average mutual fund had fund charges of 1.25%. For roughly the same cost you can work with an advisor who will build and monitor a portfolio based on your risk tolerance, goals, and needs while working to minimize your tax liability and downside risk. The best way to illustrate your lack of control in a mutual fund portfolio is to look at “phantom income”. This essentially is income derived from dividends, or selling transactions that trigger a taxable event even though you never get the income. You can sell your mutual fund to pay the tax on “phantom income” but that would be another taxable event.

At Lanier Financial Group, our portfolio management strategies and financial plans are directly driven by the risk tolerance, needs, and goals of each individual client. If you have a question about your current situation we would love the opportunity speak with you and earn your business. Although there is no such thing as a free lunch our initial consultations are truly free. Once engaged we operate as a fiduciary on a fee basis to provide financial planning and portfolio management services.

If you like this article you should check out our article regarding The Types of Financial Advisors