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gerryborn

Advisor Or Salesman

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Sierra did have a point. Why are salesmen in the financial services industry called "financial advisors"? I have many relatives in the carpet business; are they "carpet advisors"? If they referred to themselves as such, they would be ridiculed and rightly so. Are teachers "pedagogical advisors"? (Teachers, try passing that one off in the faculty lounge.) Why should an individual who is selling financial products be considered a “financial advisor”? Sure they give some advice, but their ultimate goal is to sell something.

 

I think the term "financial advisor" is comical and misleading. When most people hear the word “advisor” they assume that objective advice is right around the corner. Nothing could be further from the truth in the financial services industry. Most “financial advisors” want you to buy their products—end of story. Most of the products I have seen in my district flat out SUCK. Most of the “financial advisors” I have come in contact with want to sell me a substandard product. Am I crazy to view them as salesmen first and foremost? No, I am rational.

 

Am I being unfair to those “financial advisors” who provide real advice to their clients? Of course not, but I do not care. For my own fiscal well-being I view everyone in the financial services industry as a potential thief who is out to steal my retirement via fees, loads, or surrender charges. Judging from the history of the 403b market a great deal of mistrust towards “financial advisors” is merited. Just today I spoke with a co-worker who is trapped in an annuity with a 10-year surrender charge. This individual is desperately trying to find ways out of the product without losing his .

 

The bottom line is this: “FINANCIAL ADVISORS” DO NOT MERIT THE BENEFIT OF THE DOUBT BECAUSE TRUSTING THEM CAN BE VERY HAZARDOUS TO YOUR RETIREMENT.

 

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Guest Sierra

There is simply not enough time in the day to sell and to advise. In fact I believe it is a conflict of interest to attempt to do both. This is why many former salespeople left the selling side in favor of becoming fee only advisors.

 

It is interesting to note that a fee only advisor would feel that his role is not being described appropriately if he was referred to as a salesman but when the salesman is referred to as an advisor he feels his status or role has been enhanced.

 

Peace and hope,

Joel

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Guest TR1982

"It is interesting to note that a fee only advisor would feel that his role is not being described appropriately if he was referred to as a salesman but when the salesman is referred to as an advisor he feels his status or role has been enhanced."

 

Clearly, you know this since you have been a salesman and a fee only advisor?

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Since in my former life I had worked as a salesman, and so did my father, I feel that there is nothing wrong with being a salesman. In fact, salesmen do provide a service in many industries. I would think that a person would be happy to be called a salesman. I know that I was, and so was my father.

 

Anyway, I don't discount TR because he is a salesman, and does provide a service (at a profit). Actually many of the people who own these products would not, if not for the salesman.

 

What I don't agree to is the insistance of TR and others trying to make the product and industry something that it is not. Using the term "advisor" in my opinion is generally misleading.

 

Ira

 

P.S. TR don't have a heart attack.

 

 

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Guest TR1982

I'm not having a heart attack, don't worry.

 

I appreciate your kind remarks concerning salespeople.

 

I don't dispute that many people in the financial services industry are only salespeople and do not give any advice. But this issue is much grayer than many people (including Sierra) seem to believe. The inference here is that the only advice you can get that is good, is advice that you pay for a on a fee for service basis. I'm not going to change some minds here and that's not my objective. I just think there are many professions in life that function in similar ways and we don't question them. We just take that into consideration and try to use good judgement.

 

For example: If you have a back problem and you go to see a back doctor that performs more back surgeries than any other back doctor in the state, should you be shocked if he recommended surgery? I think not.

 

If you are injured in an accident and you go to a personal injury lawyer should you be surprised if he says you have a good case and should sue? I think not.

 

If you think your roof looks worn and should be replaced, would you be surprised if a roofing contractor recommended that you reroof your house? I think not.

 

What should any consumer do to make sure he gets the right advice? Get more than one opinion. Then use your own good judgement to make your decision.

 

I just think that statements to the effect of "you can't get good advice from a salesperson" are ridiculous. By that standard, there are probably only a few thousand people in the entire US who could qualify to give advice.

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Gerry,

 

There are good financial advisors and bad ones, just like every profession. Should you be on guard? DUH! Your point is common sense and doesn't really need to be discussed IMO.

 

BTY, as a teacher I feel that I am the ultimate salesperson. If I don't get kids to "buy into" what I'm teaching on a daily basis, they don't learn. I get paid pretty well (but not enough) to get my kids perform/take action/think. This is sales, isn't everything in America? The really sad thing is in teaching, bad teachers/advisors/salepeople still get paid while making their clients/students suffer for a school year.

 

As an aside, I feel bad when I have to "sell" my kids on the idea that standardized testing is really a good thing for them/worth their time.

 

As for your friend's situation, give some details. I doubt that it can't have a good conclusion, especially with all "the know it all" people on this site.

 

take care,

 

Chad

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TR,

Your comments about comparing other professions and how they get paid with the compensation of the financial management profession have been brought up before and argued endlessly. Its another point that is really for the newbies who never understood compensation. Heck, most of my colleagues think your services are free. Anyway, you and I will never agree on this either.

Couple of points:

1. The financial management profession is the most lucrative and profitable profession in the world. I did not say that, a 403b auditor at KPMG said that at a convention I was attending. Why is this so?

A. No other profession keeps making money from a client for decades or for as long as the investor is investing and invested in their product.

B. The financial adviser makes money from you no matter what happens in the market. Oh sure, they make more money with the market goes up than down, but the point is that the adviser MAKES money and even when the investor may lose much of his or hers.

C. There is a feature of investments which gets people irrational by buying and selling thinking that they alone have found that stock or fund to make them rich overnight. Performance chasing makes a lot of money for the profession. In the end, the brokers/adviser gets commissions and fees for each trade.

D. A typical financial adviser may have up to hundreds of clients. The guy at the teachers' union hall told me he has 450 clients. I see someone who has 450 savings accounts. 450!!!!! While they are not his, he does collects a fee, commission or some kind of compensation from all those accounts year in and year out. And what does he do? How can he possibly provide value when A. he has so many clients and B. nobody can predict the stock market and C. all he can provide is asset allocation, which is a piece of cake and does rate all of that compensation.

 

The MD, JD, Dentist and your contractor you talk about get paid by a single charge for services rendered, but not the financial management profession. They get paid and paid and get paid more. That is precisely why we argue for the fee only financial consultant. Then your profession will be equal to the other professions you and others have tried to compare.

Steve

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Guest TR1982

Steve,

You make some great comments and I appreciate your reasoned response. I would respond this way:

 

1) If you compared the average compensation in the FS industry to other professions such as law or medicine, I doubt the average advisor is making more than these people, probably considerably less. I only wish I made as much as some doctors I know.

 

2) The purpose of the advisor isn't to try to do something no one in the world can do. The advisor can't make money for you when all markets are losing money, just like a doctor can't tell you he's going to cure you of pancreatic cancer. We don't know how to do those things. What we will do is try to manage your risk as an investor given the context of your goals and objectives.

 

3) I'm glad you think all the things we do are easy and don't deserve any compensation. If that's true, why do you pay mutual fund companies to invest your money? Why not buy your own individual securities? BTW, there are lots of people out there who home school their kids because they think they can do it better than you. I'm sure you don't agree. But you know what? They still have to pay their taxes which pays for teacher salaries. At least in the investing world you get to chose.

 

4) Lastly, a lot of people here rail against these things and I'm sure it makes them feel better. The reality of life, though, is that most people don't know how to manage their investments and would prefer to pay someone to do it for them. You can chose to do it yourself and that's wonderful but that is not where 90% of the investing public is. I am just like you, I didn't create the system I work in, I just do the best job I can for the clients I work for. Some things should be changed, sure, but that doesn't mean that everything about is terrible or that most people's needs aren't being served.

 

BTW, there are a lot of people out there who would prefer to pay for advice through assets under management rather than a flat fee. Are they wrong for choosing that method of payment?

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Guest Sierra

A doctor recommends surgery and the patient takes his/her advice. Dr. earns a one time fee. Patient pays dr. directly.

 

403(b) salesperson recommends a VA/mutual fund and customer buys it. 403(b) salesperson gets compensated from product vendor every two weeks for distributing product to customer. This arrangement is nothing more than getting home delivery of facial products every two weeks---the salesperson receives a commission on each and every delivery notwithstanding the fact that it is the same soap being delivered.

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Guest TR1982

Well, if you prefer, the entire amortized cost of the delivery of product and advice can be charged upfront at the point of sale. If you prefer that method, that's fine. It's just that a lot of people don't want to pay for it that way.

If the surgeon charged you $20,000 for the operation, he might give you a choice as to how to pay. You can pay upfront the 20k or pay $358 a month for 5 years at 1.5% interest annually. Take your choice. If you don't think the surgeon isn't going to charge additional for the time value of the money, I think you are fooling yourself. That is a cost of doing business for him.

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Thanks to all posters for another interesting back and forth.

 

Steve - I can think of another profession where the client pays and pays year after year regardless of the performance.....ours. If you look at the taxpayer as client, and a badly-run public school system such as the one I have recently alluded to, examples abound: Politically-connected, No Child Left Behind "consultants" getting paid $1,500 per day for dubious advice. No-bid contractors for school construction and other supposed services. And, as Chad mentioned, a smattering of ineffective teachers who are nonetheless compensated for life.

 

I guess Buyer Beware is always a good rule of thumb.

 

This board, on the other hand, serves as a shining example of enlightenment, advancement and excellence. Those contributing to it are putting their time and energy toward a very positive type of activism and a true public service.

 

Thanks again.

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Guest Sierra
Well, if you prefer, the entire amortized cost of the delivery of product and advice can be charged upfront at the point of sale. If you prefer that method, that's fine. It's just that a lot of people don't want to pay for it that way.

If the surgeon charged you $20,000 for the operation, he might give you a choice as to how to pay. You can pay upfront the 20k or pay $358 a month for 5 years at 1.5% interest annually. Take your choice. If you don't think the surgeon isn't going to charge additional for the time value of the money, I think you are fooling yourself. That is a cost of doing business for him.

With the MD the business relationship ended with the conclusion of the surgery, regardless of the payment arrangement. With the 403(b) salesman it concludes and starts anew every two weeks; a form of being on automatic pilot.

================================================

The buyer of a mutual fund (load and no-load) pays for investment advice via the operating expense ratio. These investment management fees are paid to the people who do NOT do the selling---they do the investing---they are paid to manage the portfolio.

 

To refer to the person who gets paid to sell or distribute product an "advisor" is, therefore, wrong. This is true for both kinds of distribution methods, load and no-load. The no-load firm pays their reps a salary to distribute product---not to give advice! The loaded rep earns his/her commission because he/she has distributed product not because he/she dispensed advice! Again, the mutual fund investor (load and no-load) pays investment managment fees to the Registered Investment Advisory firm that make investment decisions on behalf of the investment company (mutual fund) every business day.

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Guest Sierra

 

 

 

 

History Teaches Lesson about Investment Fees

 

 

 

 

College Savings Educator

 

 

Retiring with Natalie Choate

 

Investment Insights

 

Fund Times

 

 

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Enter a product name or topic (such as financial-planning software or scanner), then click Go.

 

 

 

 

 

 

Dan Danford | 07-07-05 |

 

 

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Brent Hicks' article, Three Obstacles to a Fee-Only Business, prompted me to add my two-cents. His No. 1 obstacle, historical sales culture and philosophy, is the point I keep raising with consumers and colleagues, but many folks in the industry simply don't "get it"--nor will they until the market forces it upon them. (Until then, they have a strong vested interest in keeping things the same.)

 

Let me be frank. The investment world has entered a phase where commission-based compensation can't and won't last. I know, the fee-based lingo is popular among brokers and registered reps because it preserves their ability to sell commissioned products, but Brent is exactly right when he says that, regardless of our compensation mode, investment advisors should be "advice-driven."

 

The perfect model is fee-only, and due to market forces, it’s only a matter of time before commissions disappear altogether. To understand my assertion, you'll need to follow a brief review of business history. I promise it will be quick, but it's necessary to make a compelling argument.

 

Phase One: Manufacturing

 

The practice of commerce in America has followed three distinct stages. The first stage, born of the industrial revolution, was manufacturing. Companies took raw materials, molded them into products, and sold them to hungry consumers.

 

There wasn't much variety, but it didn't seem to matter. Anything a company could make was devoured by a product-starved population. Much of the country was agricultural and new gadgets eased a hard lifestyle. Henry Ford exemplified the early manufacturing phase. Asked about his Model T, Ford directed, "Give them any color they want--as long as it's black." Sales didn't suffer one bit.

 

Phase Two: Advertising

 

Manufacturing became more efficient and competition boiled over. Madison Avenue kicked into full gear and advertising bloomed with the television. Now, manufacturers made a product, but profits flowed through companies that sold them. Variety exploded as companies used differentiation as a sales technique.

 

Cadillac fins kept getting bigger and fashion of all kinds became a principle of management. Give each salesman more to talk about and more sales will result.

 

Phase Three: Marketing

 

Here's where we are today. The four Ps of marketing--product, placement, price, and promotion--have been around a long time. But consumer democracy (marketing's ultimate manifestation) is just beginning to settle in. And, like the Chrysler commercial used to say, "This changes everything."

 

Look at it this way. Products and services used to be distributed through rigid channels. You'd buy a new car from the dealership or telephones from the telephone company. You went to the record shop to buy music and a department store for clothes. Companies controlled product availability, information, and every step of the buying process. Perhaps we had a choice of stores, but we had to choose some store!

 

Where did consumers get genuine investment information? Where did they go to buy an insurance policy? If they needed cash to buy something, where did they borrow? See, in the good old days of second-phase business, the consumer had little clout and even less information.

 

Sales commissions were a terrific management tool in this environment to sell everything from cars to mutual funds. The customer could choose which stockbroker, but not no stockbroker.

 

It was a pretty good system except for one thing. Commissions were never good for, and were never designed for, the customer. Sure, everyone paid them as a necessary toll for buying products. The commission was simply built into the price, and lacking another alternative, we paid it. Since it was in every product, we silently bore the pain.

 

The Perfect Solution

 

Way back in college, I learned that the perfect marketing company would "figure out what the consumer needs and offer it." I learned that the selling process would lose importance when knowledgeable consumers could easily seek out products and services. I learned that companies of all kinds would prosper when they truly integrated a customer perspective into their offerings. Two decades later, I still know these as truths.

 

In a world where quality information and terrific products are just a modem away from almost everyone, second-phase companies can't really survive. Sales commissions are no longer a necessary toll and consumers won't pay them forever.

 

That's not saying they won't pay anything. There are still legions of people who don't want to choose investments, and many of them seek advice and assistance. It's just that they'd prefer financial advice untainted by a sales pitch and commission. You can argue that you've not seen this in your practice, but I assure you it's true (you probably feel this same way personally about other products you buy).

 

Oh, I know commissions are still out there today and some investment firms using them still thrive. There are still modest markets for buggy whips and butter churns, too. For reasons stated above and a few others, some commissioned products will always be with us.

 

The whole fee issue comes down to this, though. Commissions were always good for the company and rarely (if ever) good for the client. I've heard the arguments and followed the trade commentaries. I've watched as some people and firms turned this into a moral crusade. This is the practical truth as I see it--the investment world has entered a Third Phase where old methods won't--and can't--last.

 

Old age and new technology have finally killed the investment commission system.

 

Dan Danford, MBA, CRSP®, is president of Family Investment Center. He is the author of two books, May I Help You: Why You Need a Fee-Only Advisor and Million Dollar Management: Simple Lessons to Use Wealth Management Principles for Your Family Investments. Both books are available through Amazon.com.

 

 

 

Questions and comments about this article should be directed to site manager Jerry Kerns.

 

 

 

 

 

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Three Obstacles to a Fee-Only Business

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JP

 

As a person who had worked in South Central LA for a number of years having a select group of students, namely the Crips and Bloods I can identify with how you feel. I retired early, and currently am developing a second carreer. I started to take yukulele lessons about four months ago. I hope to become a professional yukulele player .

I lived in northern nj for several years, and go back fairly regularly. I'm not sure, did you say that you work in orange?

I hope that you will enjoy this site. I think that I read that you plan to go back to volunteer at the school where you worked. Out here, no body goes back. We're happy to get out alive.

Anyway, good luck.

 

Ira

 

 

 

 

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