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How to Thwart the Opaque, High-Fee, Underperforming Financial Advisors Who May Be Mismanaging Your Money

It seems like there isn't much that all Americans agree on these days, but there's this: 92% of us believe in God and 97% think that financial advisors should be held to a "fiduciary standard."

We'll save the talk about the Big Guy upstairs for another venue. But as for financial advisors, nearly every American thinks that they should be held to a standard that requires them to put their customers' interests ahead of theirs, and be upfront about fees, commissions, or conflicts of interest that might influence their advice.

Given our near-unanimity about the importance of the "fiduciary standard," it's pretty depressing to learn that 76% of investors, according to a comprehensive study, are actually wrong "in believing that 'financial advisors' -- a term used by brokerage firms to describe their salespeople -- are held to a fiduciary standard." Clearly, Americans are not getting what they want when it comes to financial advice.

It's a zoo out there
The truth is that most Americans, alas, don't have a clue about how the financial advice industry functions. And it's not entirely our fault, either, though all of us definitely deserve some of the blame. In Josh Brown's outstanding new book Backstage Wall Street, he provides the following quote from an industry observer:

"It's a zoo out there -- stockbroker, investment advisor, financial planner, wealth manager, life planner, retirement specialist, these are just a few of the terms investment professionals use to describe themselves. There are so many different breeds of investing professional today and what an investing professional does for the client has changed so much in the past decade, that few investors are clear about who does what in the new landscape or what legal responsibilities these professionals have to their clients."

As you might expect, this ignorance often leads to bad outcomes for ordinary investors. In addition to being unclear about who is who, and who is expected to do what, investors are often hazy about commissions, fees, and other hidden expenses. In one of the articles in this special report on the financial advice industry, Motley Fool analyst Matt Koppenheffer will show you how exorbitant fees can do serious damage to your portfolio.

It's your money
We've put together this series of articles in order to help you find the best possible advice for protecting and growing your wealth. Our aim has been to shed light on complex issues like advisor compensation and performance, while also providing you with helpful tips for finding and evaluating a financial professional. As we put this package together, we were guided by the following loosely held beliefs:

1. Most individuals would probably benefit from financial advice
Yes, it's true. Saving and investing is complicated, and most of us need help making decisions on asset allocation, diversification, and retirement vehicles, to name just a few challenges. The experts we talked with agreed that financial advice can be invaluable for many investors.

Carl Richards, a New York Times contributor and author of the Behavior Gap, told us that unless you see "Warren Buffett in the mirror," you may want someone to help you. And Brown wrote in his book that "the great majority of what we'll call 'ordinary' people would be better off getting some help." Even Burton Malkiel, the Wall Street skeptic and efficient-market high priest, has become more appreciative of what financial advisors can do. He said recently that they can keep "people from beating themselves" and "on an even keel."

2. There are good financial professionals and bad ones
Remember, it's a zoo out there. Some folks call themselves "financial advisors" but they are really stockbrokers who make their living off commissions from selling you as many financial products as they possibly can. On the other hand, there are fee-only, independent investment advisors who are held to a fiduciary standard. In our series, we aim to help you make sense of all of these designations and requirements.

Never forget, either, that human nature complicates things still further. There are no doubt outstanding individuals, of sterling character, working as brokers. There are a few dodgy independent investment advisors out there as well. All professions have their bad apples.

3. You're the boss when it comes to your wealth
This last one may be the most important principle of all in investing. Each of us has our own needs and psychology, so there just isn't a one-size-fits-all plan out there. Anyone who tells you otherwise doesn't know what they're talking about.

Richards really drove that point home to us when he said that solid investment decisions can only be made within the context of a good financial plan that takes into account your life goals. Only you know what you want to achieve in the future, so make sure your financial advice is tailored to fit your circumstances.

The great Ralph Waldo Emerson, in his classic essay Self-Reliance, said, "Nothing can bring you peace but yourself. Nothing can bring you peace but the triumph of principles." Those are wise words to live by. And they're pretty helpful, too, when it comes to financial advice. We hope our series will help you take control of your financial future.

John Reeves does not own shares in any of the companies mentioned in the article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (32) | Recommend This Article (93)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 11, 2012, at 5:03 PM, TMFJoeInvestor wrote:

    Awesome stuff, John and friends! Fool on!

  • Report this Comment On May 11, 2012, at 5:09 PM, abc124 wrote:

    I dropped my financial advisor got a low expense ratio from Vanguard and escaped all those commission fees as well. Each stock I bought cost $75 plus a $4.95 processing fee. Now it's only $7 to buy or sell. I wish I would've done it ten years ago. With resources like The Motley Fool and others like it I believe anyone can invest on their own as long as you are willing to take time and care to research your decisions.

  • Report this Comment On May 11, 2012, at 5:14 PM, topbeancounter wrote:

    well written article....

  • Report this Comment On May 11, 2012, at 5:18 PM, Regarded49 wrote:

    I think the article itself is well balanced however the point made about most folks benefitting from an FA or FP I believe not to be true.

    I believe that one who does some homework, and learns the basics can do just as well and save the fees. The "pros" are much more concerned with their bank account, which is only natural I suppose. Much like insurance companies that offer annuities relying on investors fears and lack of knowledge to sell their product, advisors take a much similar approach unfortunately.

    With the tools on the internet, and the free services offered by the likes of Fidelity Investments, there should not be a problem for anyone who wants to find the information needed, to find it.

    It is all right here on the internet, everything, for free.....just use it.

  • Report this Comment On May 11, 2012, at 5:21 PM, mikecart1 wrote:

    I dropped my financial advisor early on when I knew nothing about the market and my bank account was puny. After realizing I was paying him $500/year for his 'mastery of the stock market' and $20-30 in commission on every trade within the worthless selection of mutual funds and etf's, and realizing with simple math I was not even breaking even with all these expenses, and realizing that he did not take me serious when I said I wanted to be at a certain point by the time I was 30, and me realizing that there was no way at this pace I would ever reach that point if I lived to age 100, and realizing that he knew less about the stock market than me, I dropped him the day after we had a nice pleasant coffee lunch to discuss the upcoming year and all the great things that would happen.

    Great things alright:

    -Day 1 - Got my $500 back for the upcoming year

    -Days 1-7 - Phone calls around the clock I never answered asking me what was wrong

    -Day 30 - Moving what money I had left into where I wanted it

    -Day 365 - Doubled my net worth

    -Day 1000 - Quadrupled my net worth

    -Today - Money ain't an issue

    Fail fast, succeed sooner is the motto to follow if you want to create your own lotto in the world of tomorrow! :)

  • Report this Comment On May 11, 2012, at 5:44 PM, bevevino wrote:

    I use an advisor for part of my portfolio and manage another portion myself. I use several principles.

    1. The Advisor is not the custodian of my money. The controls a managed account which resides with my broker, creating a firewall against embezzlement,

    2. Advisor fees are not dependent on transactions. I pay a percentage of the portfolio under management, so there is no incentive to churn. It does incent increasing the value of my portfolio.

    3. I reserve the right to not have instruments purchased that I do not approve of. I will not use an Advisor who refuses all input.

    4. I ask the Advisor the rationale for decisions and expect a lucid explanation.

    5. I expect the Advisor to beat the market most of the time, in both up and down markets. I dismissed and Advisor who did well in an up market, but refused to sell or modify the portfolio when the market tanked.

  • Report this Comment On May 11, 2012, at 5:46 PM, jc09058 wrote:

    very true and well written.

  • Report this Comment On May 11, 2012, at 6:02 PM, Notfooled1 wrote:

    Using THE MOTLEY FOOL as your adviser may be hazardous to your financial health.

  • Report this Comment On May 11, 2012, at 6:08 PM, RetiredExCPA wrote:

    I think pennstater2005 hit the nail on the head. I have recommended Vanguard to many former clients.

  • Report this Comment On May 11, 2012, at 9:34 PM, 80andwise wrote:

    Thwart financial advisors - learn to do-it-yourself.

    Every minute you spend educating yourself will pay back in thousands of dollars.

    Use Vanguard for everything, because expenses add up, and compound, and they are better in your pocket.

    You will make mistakes, but so will they. Why pay them to lose money for you.

    I started at 55. I'm a math dyslestic! but a calculator cures that. I now enjoy a comfortable retirement - you can too!

  • Report this Comment On May 11, 2012, at 11:15 PM, TMFBane wrote:

    Thanks for all of the great comments, everyone! It's really nice to hear everyone's personal experiences. And it's also very encouraging to learn that some of you have had success going it alone.

  • Report this Comment On May 12, 2012, at 12:45 AM, Synchronism wrote:

    @ bevevino:

    Agree with everything but your fifth item. Firing someone on that basis alone during a down market can crystallize your losses and preclude your portfolio from market recoveries -- opportunity costs are pretty high.

    Averaging down has been a very lucrative tactic for me in my experience, but only when: (1) you're not trigger-happy on low-damage market strikes, and (2) you screen and research thoroughly to avoid value traps. :)

  • Report this Comment On May 12, 2012, at 12:45 AM, KKoleto wrote:

    Never had a financial advisor. Don't beleive in them. Get a good CFP for direction, then manage your own $$$.


  • Report this Comment On May 12, 2012, at 5:29 AM, simbaMkubwa wrote:

    I'm from the UK and consulted a 'financial advisor' who was a member of a professional body.

    Turns out that she was nothing more than an independent slaesperson selling policies/investments that yielded her the best commisions.

    My interests could not be further from her interests.

    Needles to say she got dumped and I've never consulted an IFA since.

  • Report this Comment On May 12, 2012, at 6:25 AM, TripleLindy wrote:

    The majority of 'financial advisors' are simply salespeople, selling financial products. No different than used car sales people, just selling a different product. Insanely overpaid for the 'value' they (don't) create. When the market is up, it is 'see how great I am', and when the market is down, it is 'well, the market is down, and so is every one else'. They can't lose! Then then espouse the virtue of tax losses - like they did you a favor! Snake oil salesment of the 21st century.

  • Report this Comment On May 12, 2012, at 8:53 AM, CincyWalrus wrote:

    My son-in-law could benefit from your advice. His "financial advisor" has him in high, front-end load mutual funds for the majority of his portfolio. HE uses a buy & hold strategy for the few stocks he buys for him. His total return is absolutely pathetic. I have suggested several times that he should change investment advisors but his advisor is his "friend". He truly is a "fool" for relying on this guy.

    Is there a good, free program that can be used to measure investment performance against the various averages? Perhaps I can convince my daughter to upload their contributions and balances so he can determine what his "friend" has actually done for him the last 5 years.

  • Report this Comment On May 12, 2012, at 9:42 AM, rossirina wrote:

    I would like to suggest that we all work with fiduciary advisors only. If your advisor isn't open enough to share with you how he makes money and isn't willing to place your interest (you are the customer – it's your money) ahead of his than simply go look for another one.

    Advisors that are NAPFA registered ( are all fiduciary. Some are organized in groups / networks such as the Cambridge Alliance ( or the Garrett Planning Network (

    My advisor is is fiduciary with online offerings that appeal to me.

  • Report this Comment On May 12, 2012, at 9:43 AM, snickerdoodle9 wrote:

    @bevevino : Glad to see that U and I are on the same page . I use an advisor for part of my portfolio and manage another portion myself. I use several principles.

    the part of my portfolio that I am getting help with from a fee only adviser are corp bond/blue chips ( 7 companies paying dividends once every 6 months ) all of which are paying above the purchase price . The other portion of my portfolio I manage ( 9 high yield dividend companies @ 100 shares each ) . When the dividends pay out ( monthly , quarterly , and once every 6 months ) I reinvest them . With the volatility that we have seen in the market over the last several months , I haven't lost any money . That's how reinvesting the dividends provide protection provide to my portfolio . I use a discount brokerage firm . When a financial adviser see's that U are knowledgeable about what U are invested in , investors are not going to have any issues with them mismanaging their money . The best offense is a good defense ; education .

  • Report this Comment On May 12, 2012, at 10:15 AM, TMFBane wrote:

    @CincyWalrus, You've raised a very important issue, and we addressed it as part of our series here:

    Fool analyst Matt Koppenheffer concluded the article by offering up the following questions that everyone should ask about their advisor's performance:

    Are the returns in my portfolio clearly displayed and easy to understand?

    Are my returns compared to applicable benchmarks?

    Is my broker or advisor willing to walk me through any aspect of the performance that I don't understand?

    Are my returns beating their benchmarks?

    In the best of all worlds, your son would sit down and candidly ask his advisor about his performance. If your son's reluctant to do that, then he should perhaps get a second opinion from an independent, fee-only investment advisor.

    There are, of course, lots of ways to measure the performance of the current advisor, but there are a lot of variables, and it would likely require an analysis from a professional.

  • Report this Comment On May 12, 2012, at 11:02 AM, mill3417 wrote:

    "Fail fast, succeed sooner is the motto to follow if you want to create your own lotto in the world of tomorrow! :)"

    Genius!!! Forget the Financial Advisory System!!! LOL.

  • Report this Comment On May 12, 2012, at 11:15 AM, Smithtenn wrote:

    The statistics I have read several places that say the atheists (don't believe in God) are about 30% of the population. I hope the rest of the numbers in your article are more reliable than than the one on numbers believing in God. smithtenn

  • Report this Comment On May 12, 2012, at 11:28 AM, TMFBane wrote:

    Hey Smithtenn,

    I got that figure from a Gallup poll:

    But that isn't the point of the article, of course. All of our numbers were checked by a CFP who both edits and writes for But if you find figures that are incorrect, tell us. And we will correct them.

  • Report this Comment On May 12, 2012, at 4:55 PM, Anishinabe wrote:

    We have a family trust established with a bank many years ago. The fees and charges have risen regularly and the portfolio has not made much progress. Through a series of bank mergers, the trust has bounced from bank to bank. Although we tried for many years to move the trust from the banks, the original bequest specifies a bank as holder of the trust. and the banks have refused to change anything. As it stands now, at some point,the trust will be eaten up by fees and cease to exist. Don't set up a trust with a bank unless you are sure it is revocable in some manner.

  • Report this Comment On May 12, 2012, at 5:44 PM, Gfhughe5 wrote:

    I left my Wachovia broker a decade ago and went to Fidelity for excellent service, research, and spread executions. (Their $7.95 fee is irrelevant; money saved on good limit buy/sell executions far outweighs it.)

    Individual investing is a hobby that takes considerable time to do well; especially the psychological part.

    Remember, the average investor makes no money at all in the market. He buys high and sells low. That's why some of us can make money by contrarian investing. And the brokers can buy yachts. (Remember Fred Schwed's book "Where are the Customer's Yachts?")

    So many investors would do better with a certified financial analyst.

  • Report this Comment On May 13, 2012, at 12:15 AM, szuggy00 wrote:

    This is a classic forest for the trees story. Read the DALBAR study that comes out every years. Investors underperform even their own investments because of a number of self-inflicted wounds that a responsible financial advisor will avoid.

  • Report this Comment On May 14, 2012, at 1:08 PM, TMFTomGardner wrote:


    Great stuff -- so long as that advisor is a fiduciary. It is the hiding of fees, the misalignment with the customer, and the defense of it that we challenge (and even ridicule) at The Motley Fool.

    Fee-only advisors with the fiduciary tag have the potential to be extremely valuable to individual investors. The trouble is..finding them. A place like the Garrett Financial Network is a sound way to start.

    Tom Gardner

  • Report this Comment On May 21, 2012, at 10:40 AM, fightingamish2 wrote:

    Look at the Dalbar Reports and see how the average "do-it-yourselfer" has performed. The short andwer is poorly. Those who use a good financial advisor can benefit from sorting through how to balance a portfolio, how to pick quality and how to respond or not respond to market movements. Generally, people make emotional decisions and place too much weight on second hand information. I'm an believer in finding a good financial advisor and letting the advisor teach you and grow. Then you and the advisor together can make some solid decisions.

  • Report this Comment On May 23, 2012, at 6:59 AM, cookiereader wrote:

    I am a 9/11 responder widow who had 2 children to raise. A friend bought me to Morgan Stanley who placed me in junk bonds. Then by the time I realized I was brought by another friend to Ameriprise who placed me in all high front and back ending funds. It was horrible what was done to me and do not know how these SO CALLED FINANCIAL ADVISORS live with themselves!!

  • Report this Comment On May 23, 2012, at 10:20 PM, tom2727 wrote:

    I think the best way is to be your own financial advisor. I couldn't believe when my parents showed me the documents their advisor gave them. They pay 1% of their portfolio per year so he can pick a bunch of mutual funds for them? I guess if it makes them feel more comfortable...

    My rules for any young people out there:

    1) Learn all you can from wherever you can.

    2) Invest your own money. If you get advice, UNDERSTAND it before acting on it.

    3) START INVESTING YOUNG, and learn from the mistakes you WILL make while it's cheap.

  • Report this Comment On May 24, 2012, at 11:17 PM, CRNA1109 wrote:

    Great article. My parents had a hefty sum of money that they turned over to a brokerage that will remain nameless. managing their money put it all into high risk tech type mutual funds even though they plainly stated they were low risk type of people. Unfortunately, they just were not savvy enough to know what they were looking at when they got the statements and I live hours away. Account values went up and the guy was shuffling from one fund to another. My pop decided he didnt like all that and tried to call and ask the man to stop moving his money around b/c it was generating fees fees fees and to just talk to him about the volatility of the portfolio. He was more or less condesceding on the phone and hung up rather quickly. Then the market started to tank, hard. My dad never could get the guy on the phone anymore but he left many messages telling the guy to pull his money out b/c he was losing it faster than he could count. My parents retirement funds went from over half a million to just under half before my dad got him on the phone and basically threatened to show up at his office. He can be scary. After that my dad was so freaked out by the market he got out completely. l just now talked my mom into getting back in. Arbitration was the only recourse and my dad got sick with cancer. They never were able to do anything about it. He made his money off my folks and screwed them over at the same time. I'll NEVER use a FA.

  • Report this Comment On July 05, 2012, at 3:48 PM, trot1545 wrote:

    I love how everyone here is blanket recomending investment strategies. "Use Vangaurd", "Use fidelity", "don't use front loaded funds", ect. ect. Like you know me or what's best for me...

  • Report this Comment On July 09, 2012, at 6:19 PM, maazzoo69 wrote:

    Great way to end the article: ""Nothing can bring you peace but yourself. Nothing can bring you peace but the triumph of principles."


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