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I'm working with a finance professional to receive guidance on investing and retirement planning for down the road. We like the individual that we are working with but he/she is compensated via sales/commission.

When reviewing suggested investment opportunities such as annuities, whole life insurance, etc., there is a lot of legalese (i.e. clauses, riders, etc.) and we are unable to ascertain on our own if we are getting into an investment vehicle that fits us.

Are there professionals that we can hire for a second opinion, a professional that does not have a vested interest?

3 Answers 3

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What you're describing is the classic mistake. You'll only be recommended products which pay a living-wage sales commission. Those include ripoff products like variable annuities and whole life, which are structured specifically to be impossible to understand, so you will never be able to figure out what a bad investment it is and how they're sneaking fees out of it.

However, they also include managed mutual funds with sales loads, that would be bad investments even if they didn't have sales loads.

Here's an example. My mainstay investment is VFINX. This is an index fund that tries to track the S&P 500. That is, it buys and sells its assets so they are proportional to the contents of the S&P 500. Since that's all it's doing, the fund costs very little to run. My costs are $0 front-end load, $0 back-end load, and 0.14% annual expense ratio. In other words $1.40 per $1000 invested, per year. Minimizing expenses is the surest investment in investing.

It's a fantastic investment by objective standards. But riddle me this: from what source does VFINX pay a "living wage" sales commission to my salesman? It can't. There's no money there.

Do you think your salesman is going to recommend VFINX?

Of course not. This is the crux of the problem with commission based salesmen.

What they'll sell you is a managed fund, where some Rain Man stock picker tries to beat the S&P 500. Rain Man requires a huge salary and a large research department, which requires an expense ratio ten times higher - typically 1.5% per year or $15 per $1000.

How do we even tell if a manager is any good? After all, the market goes up and down all by itself. How do we tell if he manager is doing better than can be expected? We compare their performance to an index such as the S&P 500.

So in order to beat the index fund, they must beat the market by 1.36% per year. [1.5% minus 0.14%). Are they able to? Statistically NO. Not even close. Nobody's that good. Some are lucky, but not repeatably. As such, science has shown that managed mutual funds aren't as good an investment, because of the high fees.

But even this high expense ratio doesn't pay the salesman, that's another charge called a sales load. They will either have a 5%-ish "front end load" coming in, almost all of which is kicked back to the salesman, or some sort of exit load that somehow subsidizes the commission. This is even more total loss for you.

Same nonsense with the annuities and whole life

Without fail, these salesmen recommend those to everyone. Life insurance and annuities probably don't even fit your needs; they're just easy to rack up commissions on. Whole life is a complicated way to bundle life insurance with investments again to conceal hidden costs. If you need life insurance by plain old term life, which is what it says on the tin. If you want investment too, invest too in smart investments.

Annuities are rarely appropriate and when they are, a fixed annuity will generally cover needs. And fixed annuities are simple and clear enough that any internal ripoffs will be obvious.

Again, variable annuities are a complicated way to combine both a fixed annuity + stock investing, and give you a giant snow-job so you don't understand all the hidden costs, expenses, fees and loads.

That's why those products are always pitched to you.

There is just no way for your interests to be fairly represented by someone who earns commissions on your investments.

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Yes, fee-only financial advisers/planners exist and in my view are the only reasonable choice. An adviser/planner may have a fiduciary duty to you and also collect commissions by selling you certain products, this apparent conflict of interest is what makes fee-only important to me.

You can search for "fee only financial planner near me" but a lot of the results on google will not be fee-only financial planners. Yelp seems to have good results.

A separate commission-based advisor might give you an honest opinion on the advice you received, but it's hard to trust the advice of those that stand to profit.

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  • Did you mean "may not have a fiduciary duty"? Jan 2, 2023 at 18:26
  • @KarlKnechtel nope, despite being an apparent conflict of interest someone can have a fiduciary responsibility and be paid commissions.
    – Hart CO
    Jan 2, 2023 at 18:41
  • I'm just generally confused by the structure of the paragraph. By "an adviser/planner", did you mean specifically fee-only ones, or were you trying to contrast with others (in order to indicate the problem with commission-based ones)? Jan 2, 2023 at 18:42
  • @KarlKnechtel does my addition to the 2nd sentence help? I appreciate the feedback!
    – Hart CO
    Jan 2, 2023 at 20:29
  • It could probably use further copy-editing, but I understand now. Jan 2, 2023 at 20:45
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You mention this:

he/she is compensated via sales/commission.

then give the example of this:

When reviewing suggested investment opportunities such as annuities, whole life insurance, etc., there is a lot of legalese (i.e. clauses, riders, etc.) and we are unable to ascertain on our own if we are getting into an investment vehicle that fits use.

Investing is generally a good thing.

Life insurance is generally a good thing. The use of the pronoun we implies that there is a significant other in your life, therefore increasing the likelihood that life insurance is needed.

The problem is that instead of term life, they are proposing whole life and/or an annuity. When you mix investing and life insurance into one product the result is something that is overly complex, and might not meet your needs.

You need to find a fee only financial planner. I have used the National Association of Personal Financial Advisors (NAPFA)

About Us

The National Association of Personal Financial Advisors (NAPFA) is the country’s leading professional association of Fee-Only financial advisors—highly trained professionals who are committed to working in the best interests of those they serve. Our rich history began in 1983 when a group of advisors simply wanted to serve their clients without muddling the relationship with commissions. Since then we have developed high standards in the field and each advisor must sign and renew a Fiduciary Oath yearly and subscribe to our Code of Ethics. It's all a part of the mission of NAPFA. The association provides support and education for more than 4,400 practitioners all over the country and is governed by the NAPFA Board of Directors and supported by our four Region Boards.

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