Financial experts are a key element in the mutual fund industry. If they're expert and unbiased, they're worth every penny they earn. Unfortunately, the mutual fund industry works against finding such a person. Here's what to do.
Conventional wisdom says that your broker should have your best interest first in mind and should know more than you do. But when a financial advisor or broker's compensation is connected to which funds pay the most fees, how could they be completely objective? They can no longer be unbiased. They no longer put the client's interests first. This is systemic. This hurts you as an investor.
It does not help that investors often hurt themselves by having this childlike naiveté about how they work with financial people. The investor can have the trust of a child. I mean, the amount of trust they have with this stranger called a financial advisor is mind boggling.
And the financial advisor has to talk good, look good, look successful, be successful, form relationships easily, act like they have the client's best interest at heart. For the most part, that's what an investment advisor truly believes. It's part of what creates the bad performance.
It does not get any better when the financial advisor is embedded in the community. In fact, it's worse. The advisor is a friend to many people, but the things that lead to investment failure are still at work. We may like and trust this financial advisor, but they are still what they are: mostly biased and not objective.
Even as I talk pretty starkly about the mutual fund industry, you should know that you are part of it if you are partaking of it and not getting educated. You are creating or providing some of the momentum. A major key is to understand how the financial planners and brokers themselves operate. It's extremely interesting how they operate their business, which is not much different than how the fund families operate their. I'm talking here about financial planners, financial advisors, and investment brokers. For the sake of this article, let's refer to them all as financial advisors.
Financial advisors are an important layer of the mutual fund industry. At the very top you have the mutual fund companies. Right up there with them, you have managed account companies like GoldmanSachs, the JP Morgan family and Fisher Investments; below that, you have financial advisors.
A financial adviser is alleged to act as a fiduciary to his or her clients. This is how Wikipedia defines a fiduciary: "A fiduciary is someone who has committed to act for and on behalf of another in a particular matter and circumstance, which gives rise to a relationship of trust and confidence. care at either equity or law. "A fiduciary is expected to be extremely loyal to the person to whom he owes the duty."
This is key here: "He or she must not put their personal interest before the duty to the client."
A true fiduciary must not profit by putting personal interest first. There is nothing wrong with financial planners and fund companies making a profit. Of course it's okay. But when they actually put their personal interests first, that is a problem. When financial advisors sell the financial product to their clients that pays them the highest fees, that's not necessarily what is best for their client.
Now, I'm not saying every single financial advisor does this, but I do say it's a general rule. This is more than a slight leaning of a financial advisor toward a mutual fund company that pays them the highest rates; it's a downright preference. And that's the reason that some fund companies pay higher amounts to financial advisors than others. This works. It brings in business. These are investment companies, after all. Mutual fund companies expect a return on their dollar, and they get it.
What this means is this: Most investors go to a financial advisor thinking that they're getting objective advice. In fact, it's biased and not objective. This does not have to be. But you have to be prepared. Knowing just a few simple facts is all it takes. It is possible to adopt simple strategies that enable you to plan when you can retire.