I know there are exceptions, but my basic view is that the securities and insurance industries are in the business of separating you from your money.
Of course, it takes two to tango, but you don't have to help them.
Brokers (or "financial consultants" as they like to be called) tell you exactly what they are going to do to you in the documents you sign when you open an account. The problem is that you don't read these documents carefully. If you do, you don't understand the consequences of what you are signing. Here's a clause that appears in almost every account opening document with a brokerage firm in the U.S.:
"Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions..., including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy."
I am giving you my hard earned money and you may have conflicts of interest? You may not act in my best interest? You accept payments to recommend certain investments to me?
Here's another shocker:
The account opening statements require arbitration of any disputes with your broker. The arbitration is run by the FINRA, which is really a trade association representing the securities industry. The statements warn you about the bias of this process. Here's an example from an actual statement:
"The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry."
"The arbitrators do not have to explain the reason(s) for their award."
The arbitration "shall be conducted pursuant to the Code of Arbitration Procedure of the FINRA."
So what exactly do these two provisions mean?
Your broker may act against your best interest due to conflicts of interest (which are in his best interest). If he does, you have no access to the courts or any other impartial forum.
It continues to mystify me why anyone would agree to these terms, especially given the track record of brokers who have no demonstrated ability to intelligently manage money in the best interest of their clients.
The insurance industry works in much the same manner. It sells billions of dollars of equity index annuities and variable annuities each year, even though these products are rarely suitable for the investors who purchase them.
According to a recent article in Financial Advisor, the most vocal opposition to holding financial advisors to a higher standard towards their clients has come not from brokers, but from the insurance industry. I can understand their concern. If insurance agents were required to recommend the best possible products, instead of the ones they typically peddle, this could put a real crimp in their bottom line. Sales of variable annuities, for example, would plummet -- as they should.
Even worse, the insurance industry would have to present objective information about the benefits of term insurance and blended insurance, which are often vastly superior products to whole life policies aggressively pitched at present.
I am sure you will be shocked to learn that both term insurance and blended insurance pay significantly reduced commissions to insurance brokers compared to the sale of whole life policies. No wonder the industry is fighting so hard to avoid an obligation to present these options to you.
So what should you do? The good news is its very simple:
Only deal with investment advisors who agree in writing to be a fiduciary to you and who do not require dispute resolution before an industry trade association.
Apply the same standard to insurance agents and brokers. For larger purchases of insurance, consider using a fee only insurance consultant. They will agree to act as your fiduciary. They don't benefit from the insurance you purchase. Their knowledge of the industry and the options available can save you many times their fee. Insurance is very complicated. The industry likes it that way. A fee only insurance consultant can level the playing field.
You don't have to walk around with a bulls-eye on your back.Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.