Welcome to LA where there are as many financial advisors as there are mechanics. You’ve worked hard for your money and now you want to find someone who can help you get your money to work hard for you. Where do you start and who do you look for?
First let’s take some time to understand the different types of financial advisors. This way you can better select who makes more sense for you.
Banks – Ever since the 1980’s banks have started to offer financial advisory services. Their financial advisors are well trained and look great but they have two major handicaps. Bank financial advisors come and go all the time, because if they are any good, they usually start their own firm, and if they are mediocre, well they stay at the bank earning hourly fees advising mom and pop. Second and more important is that bank financial advisors are held under the suitability standard of care. This means that they are not obligated to put your interest ahead of their firms, unlike a fiduciary based advisor that has to put your interest ahead of his firms. Banks have shareholders and therefore have to be profitable every quarter. This forces them to sell you products that are designed by the bank for high profits, and not necessarily the best for your portfolio. It’s no wonder when you go to a Chase financial advisor, your portfolio is going to have 80% Chase investments and mutual funds in it. Be careful of this. A good rule of thumb is to use each institution for what they are good at. Banks are good for savings and loans not for investment advice.
Investment Banks – Big brand names like Merrill Lynch, Morgan Stanley and such are called investment banks. Their expertise is in Initial Public Offerings (IPOs) which means that they are banks that businesses go to in order to become a publicly traded stock. These investment banks have access to such companies when they initially hit the market. That is where their money is made! However, when it comes to their financial advisors they are lacking. Most of the financial advisors are under the suitability standard of care which means that their financial loyalty is to the firm rather than to the client. Don’t get me wrong, this does not mean that they will sell you bad stuff. It just means that if two investments have similar characteristics, the investment bank financial advisor is obligated to sell you the one with the highest cost. (As a side note, investment costs are one of the most important indicators to success. The higher the cost, the lower the return!) Remember, they have to make sure the company is profitable. Another problem I see often is that if you have less than $3 Million dollars with these firms, you become just a number. In other words, they have so many “little” clients that it is impossible for them to keep track of your investments on an individual level each month, unless you are a “big fish” with them. You want to find someone who actually knows you as a person and understands your goals and challenges so they are thinking about you even after you hang up the phone. Again try to use each institution for what their main strength is, in this case if you are looking to buy an IPO investment banks make sense.
Wire Houses – Places like Fidelity, Charles Schwab, E-Trade, TD Ameritrade. These companies are great for “do it yourselfers.” They offer a lot of research that is available for your reading pleasure as well as comprehensive trading platforms where you can buy and sell stocks on a minutes notice. They too offer financial advisors but their advisors typically suffer from the same problem as the last two organizations where they end up selling you proprietary funds created by their company since they offer the financial adviser a higher commission on those products. Remember the key as a consumer is to find someone who will put your interest ahead of their firms. Such people are called fiduciary based financial advisors.
Independent firms – In Los Angeles there are many independent firms that offer financial advice. This type of firm is by far the most advantageous for the consumer when it comes to financial advice and financial planning. Independent firms do not have company products to sell you, they do not have shareholders pushing them for quarterly profits, they are able to look at the universe of products rather than just what their firm allows them to sell. LA has a lot of good independent financial advisors because most of the guys who end up being really good at the banks and investment firms end up leaving and opening their own independent firm where they don’t have a manager constantly complaining to them about what products to shove down their clients’ throats. That was my story actually; I left the big firms since I realized that the client was just another number at my old firm. Now I am able to offer so many more tools to my clients, and sometimes we even use investment bank products, bank products and wire houses to help us with some of our client’s objectives. A free agent as they say, is the best because they are not under pressure to perform for the company, rather they work for you!
Common misconception: Many people mistake a reputable or recognizable name to mean “safety” or “good performance”. Consumers often incorrectly believe that just because a brand name is well known, that it will do better, when it comes to investing. This can not be any more futher than the truth. Just because the firm is called Merrill Lynch does not mean that their investments are any safer or better than others. Many consumers lost millions of dollars of money even though they had their account at a “brand name” firm. Most people dont realize that JP Morgan not only lost money for clients but they even lost their own money and had to be taken over by Chase bank. I offer you this classic example: Imagine wanting to travel from Los Angeles to Las Vegas and telling your friends that because you are very “conservative”, you will be riding a very well known brand BMW motorcycle the whole way there. Yikes! When it comes to investing, its not the brand that makes the difference! Find someone who speaks your language, who puts your well being ahead of their firms, who gives you logical advice rather than lots of predictions. In my next article I will define what makes a good financial advisor.
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Samuel Rad is an award winning fee-based Financial Planner with Affluencer Financial Advisors in Los Angeles, California. Mr. Rad has multiple licenses in the investments, real estate and insurance fields. He has spent a considerable amount of his career lecturing at universities and companies, on financial topics such as financial planning, retirement planning, and estate planning. He currently lectures at UCLA and West Los Angeles College.