A visitor to New York City was taken on a tour of the town. When they got to the harbor, one of his hosts pointed out to the expensive yachts that were docked and told the visitor that they all belonged to bankers and stock brokers working on Wall Street, the financial district of the City. “So where are their customers’ yachts?” the visitor asked naively. His hosts just gave each other a knowing look.
Unfortunately, the situation where an investor’s advisor becomes wealthy at the expense of the client does not happen in New York only but all over the world. In fact, the less sophisticated the investors are, the more the opportunities their advisors have of taking advantage of them. Stock brokers can churn their clients’ accounts to their hearts content, insurance agents can sell high commission cash value policies with low returns and brutal surrender charges and financial advisors sign up naïve and hopeful investors into long term investment contracts, either local or offshore that are not appropriate for the clients investment goals but trap them with heavy surrender charges. Bankers are not totally innocent either; many charge exorbitant interest on their loans but hide the fact by quoting low interest charges then applying loan application fees, valuation fees, negotiation fees and such other charges. Banks are also guilty of goading unsophisticated investors into borrowing from them to speculate in initial public offers (IPO’s), knowing full well it is not prudent to do so. Real estate is currently the killing fields of gullible investors in Kenya. Plots of questionable value are flogged at high prices by smooth talking individuals who buy prime airtime on radio, full page adverts in newspapers and huge billboards to hype the properties as sure way to wealth.
All financial professionals will protest their innocence when confronted with such accusations and will cite their code of ethics, their core values and if anything they will pass the buck to “unscrupulous agents and employees who operate in contravention of company policy”. Some will even claim to be men of God. Unfortunately such denials do nothing to help investors who have lost money after believing the sales pitch of the agents and signing up for the investment find themselves unable to achieve their goals. Of course the agent or advisor pocketed their money long ago and is now busy soliciting someone else. Way too often, financial companies pay hefty rewards for robust sales performance which encourages less than truthful presentations. Maybe they should be rewarding based on client goal achievement!
When it comes to financial planning, some “financial advisors” will not charge you for financial planning, thereby implying that the service is free. I hope that by now you know that there is nothing free. In fact many such advisors are extremely expensive but you do not get to find out since their fee is wrapped up in the product you are buying on their recommendation. To be paid for advising a client is alright since they are working for a living. However the problem comes with the inbuilt conflict of interest of being paid a commission on whatever you prescribe. The higher the commission the product pays, the more motivated the advisor is to recommend it to your regardless of whether it is the most suitable option for you or not. Would you trust a doctor who is paid commission on the drugs they prescribe to you?
In addition, aspects of the financial plan that do not pay such advisors a commission are ignored or at best glossed over. An objective fee only planning consultant has no stake in the product that you buy and works for you, looking for the best solution, with zero sales pressure. The fee they charge should be more than made up for in savings in commissions of commission free investments, reduced income taxes, cash flow savings, investment gains and most of all, the peace of mind knowing that you have taken the most prudent steps to secure the financial future of your family.
While it is very important to use financial professionals, it is even more important to ensure that their advice is unbiased. One way to do this is to educate yourself on the various financial products and also to find out how your advisor earns their money. Take a good hard look at all your financial assets and their history and ask yourself; is your financial advisor getting rich at your expense? Watch out for predatory advisors.
Manyara Kirago, RFC®, CMFC®