How Shopping For A Financial Advisor Can Go Wrong

As part of my continuing education program, I recently attended a seminar that highlighted new research which shows why an advisor who may be good for some investors, may be far from ideal for others.

I’ll start with an example that was used by the speaker: 

Let's presume you have a health problem and you visit two or three internists. Chances are good you would receive a similar diagnosis and treatment from each doctor. 

But if, for argument’s sake, you take a financial problem, or your retirement goals, to two or three financial advisors the results would be surprising. New studies show that you're unlikely to get the same, or even similar, recommendations about what investment products to buy or what strategy to pursue. And that could make a big difference in your financial future. 

According to a recent report from Cogent Research LLC, a market-research firm in Cambridge, Mass. , retirement-savings recommendations vary greatly based on the type of firm for which a financial advisor works.

For instance, registered investment advisors or planners, who own their own firms lean toward using the products offered by mutual-fund companies, Cogent says. By contrast, advisers who are affiliated with independent broker-dealers often suggest insurance products like annuities of one flavor or another, the report says, while advisers who work for the big national brokerage firms tend to suggest both insurance products and a mix of other investments, but mostly stocks and bonds. 

Meanwhile, a report from GDC Research in Sherborn, Mass., and Practical Perspectives in North Andover, Mass., says advisors in different channels use not only different products but also different strategies to generate retirement income for their clients. 

Some use the same investment strategy for both building and tapping a nest egg. For instance, they will adjust the mix of stocks, bonds and other assets in a portfolio as the client approaches and enters retirement, but they won’t introduce a new asset class in retirement. Others will make bigger adjustments, putting some assets needed for short-term expenses in safe investments like money-market accounts while leaving assets for long-term expenses in riskier investments like stocks. And some like to buy annuities to generate a steady income to cover essential costs or a desired standard of living. 

The findings of the two studies illustrate the need for older investors to exercise caution when searching for a retirement-focused advisor, and to consider interviewing professionals from at least three different types of firms: a registered investment advisor or planner, an advisor affiliated with an independent broker-dealer, and perhaps an advisor with a national brokerage firm before selecting one. 

At a minimum, experts suggest asking potential advisors how they are compensated, because that can affect their approach. For instance, some advisors might not recommend annuity products as part of a retirement-income plan, even if it might be appropriate, because they aren't licensed to sell such products and thus don't earn a commission on them. Other advisors, meanwhile, might not recommend mutual funds because the compensation they receive for selling an annuity is greater. 

Experts also suggest asking potential advisors for samples or actual retirement-income plans for clients whose financial profiles and goals are similar to yours. That's because what works for one person might not work for someone with different resources, assets and lifestyle. For instance, retirees who have sufficient assets and resources to fund 30-plus years of retirement can use what's called a systematic withdrawal approach, taking a certain percentage of your money out of your nest egg annually to produce retirement income while investing the portfolio largely in dividend-paying stocks or mutual funds. But retirees with few resources might need a different strategy and products, such as immediate annuities. 

Experts also emphasize that retirement-income plans and retirement-savings plans are very different things. The latter tend to invest, diversify and wait, which is fine if you are 20 or 30 years from retiring. The former, ideally, will assemble a group of investments that produce both steady income and long-term growth. 

I would suggest that those either in or approaching retirement seek an advisor who has a strong commitment and focus on retirement-income planning and has access to a broad range of products and services to suit those needs.