Financial Advisors Often Give Poor, Expensive Investing Advice

Want to get some investment advice that is expensive and doesn’t perform any better than other, less costly options? If so, ask your broker or financial advisor for investing advice. They’re much more likely to point you toward an investment with a “load” — a fee that ranges in price but generally runs 3% to 5% of your investment’s value — simply for them “recommending” it (some would say “selling” it is more accurate.)

The kicker? Paying more for such a fund doesn’t earn you more, it actually helps to ensure your results are less than what you could have otherwise. The details from SmartMoney Magazine…

When you pay a load, you’re essentially paying for advice. A load is really just a sales charge you pay for buying a fund that’s available only through brokers and financial advisors — unlike, say, a Vanguard fund, which can be purchased directly from the company with no additional charge. So if the guidance you’re getting from your broker is helpful, it may be worth the price tag. But if you’re comfortable investing on your own, then you probably need it about as much as a fish needs swimming lessons.

While there are many good funds out there that charge a load — including those from American Funds, which are known for their reasonable expense ratios and solid team management — there’s also no shortage of solid no-load (and low-cost) alternatives. Cost shouldn’t be your only driver when it comes to fund selection, but higher fees can lead to weaker performance. It’s not easy to beat a comparable no-load fund when you’re starting $575 in the hole.

Ya think?

Money Magazine attacks the same issue from a different angle in its May issue (article is not online yet) when a reader asks what the chances are that he can pick mutual funds as well as a financial advisor can. Their response:

You’re just as good as plenty of pros at selecting mutual funds.

They cite a recent paper written by three business-school professors as support. Their research on funds selected by advisors versus ones picked by investors directly concludes:

The brokers’ choices are more expensive. And they have lower returns too.

Wait a minute. Financial advisors more interested in making money for themselves than for their clients? We’re shocked! — Free Money Finance

Load Funds [Ask Smart Money]


Edit Your Comment

  1. SOhp101 says:

    NEVER USE A FINANCIAL ADVISOR. I used to work for a financial company that ‘trained’ these new employees and they would reiterate over and over that “this is a sales position” and then add bs about how they’re “helping other people reach their financial goals.”

    As with most things in life, if you want it done right, do it yourself.

  2. FMF says:

    @SOhp101: I agree 100%!Wish I’d said that! ;-)

  3. thrillhouse says:

    you need a financial adviser with the heart of a teacher, not the heart of a salesman. They are out there.

  4. Hedgy2136 says:

    Precisely why you should only use “Fee Only” advisors. They are paid a flat fee for any advise they give you and thus have no incentive to point you to investments with a load attached.

    There can onle y be a conflict of interest when you are pointed towards invvestments which generate the highest commisions for advisors.

  5. revmatty says:

    I started FC training (series 7) when I worked for a company that “Earned money the old fashioned way”. Those of us in that worked there generally believed the unstated portion of that was “we steal it from our customers”.

    I’d already put in 4 years there in the backoffice. I would temper this by saying there are some very good FC’s out there, but they are in the minority. The training largely revolved around three things: SEC regulations, how to cover your ass so you can’t be sued, and how to generate commissions/fees for yourself. That’s it. It didn’t even pretend to be interested in the best interests of the client.

    Note that many times the clients were no angels either. I had to process paperwork plenty of times where a client was pissed that they lost money by not following their broker’s advice and threatened to sue over it. The policy was if their loss was less than $20K the firm would reimburse them as it was cheaper than the lawsuit.

  6. Notsewfast says:

    Hedgy is right..

    Moreover, if you are comfortable and feel that you are savvy enough to pick funds on your own, go for it. FA’s aren’t all bad (I’m out of the commsion biz now

  7. bp_lv says:

    Following this out to the next step, how do you find a good Fee Based financial adviser? Especially if you don’t know anyone who can personally recommend someone.

  8. Notsewfast says:

    Let’s try again…
    Hedgy is right..

    Moreover, if you are comfortable and feel that you are savvy enough to pick funds on your own, go for it. FA’s aren’t all bad, I’m out of the commsion biz now, but when I worked with FA’s, (a good group mind you) they would often reccomend that clients who thought they could pick securites move some of their money to Charles Schwab and avoid the fees that they charge for management.

    In the end, it comes down to how much money you have… If you want to invest $50,000… then a $500 commision is a lot to you and the best brokers probably don’t want your business, but If you have some serious change to invest (ie, $1 million+) then the fees (as a percentage) begin to fall and the advice you will get comes from better poeple.

    Sorry to say it, and I can’t image that it’s hard to beleive, but in the world of investment, its all about money

  9. pabird says:

    Of course it’s a sales position! You think those hot stocks your Vanguard fund is buying are companies with no sales force? Get over the fact that sales people make money. The world works this way…or are you ready to give that cummunism thing another whirl?

    “No load” funds typically have a larger downside capture (larger participation in down markets)than a loaded counterpart such as American funds. There is no psychological barrier to exiting the fund (the fee to get in or out)and there is no advisor (fee or otherwise) to recommend against pulling out of the market.

    Downside capture is important because when you lose 50% on a $1000 investment your left with $500. You will need to earn 100% on that $500 to get back to even. Try it on your calculator. It works every time!

    Think about downside capture next time your brother in-law (the software engineer) is shoveling you investment advice over thanksgiving dinner.

  10. orielbean says:

    Remember that those advisers are registered with the NASD. You can file a complaint against them and also drag them into binding arbitration as it is part of their certification. You might not get your money back, but it is cheaper than trying to sue.

    Advising most people to pick up those alleged no-load or C class investments is usually a bad idea because they do not include 12-1b or administrative fees that can add up to be just as much as a load. Also tricky are B class shares that carry a back-end load and are only useful for a small percentage of the average investor.

    They are bad to the point where the advisor can definitely get in hot water with the NASD by selling them to people. It is part of the exam, for chrissakes!

  11. Myron says:

    For finding a fee only financial advisor, try these two organizations (warning, gross generalizations ahead):

    National Association of Personal Financial Advisors
    Many NAPFA advisors focus on rich clients. They don’t make a commission selling you products, but they do want to charge a fee to manage your investments.

    Garrett Planning Network
    Also fee only planners, but less prestigious and more likely to take on a poor schlub like you.

    There are two aspects of financial planning you will run into. Some planners are interested mainly in investment planning. This is fine if that’s the advice you need.

    Other planners look at your whole picture: savings, retirement, insurance, debt, taxes, estate planning, and so on. If that’s the kind of help you need, look for a planner who has Certified Financial Planner (CFP) credentials. Expect to pay by the hour for their advice.

    In any case, you can get good advice from a financial planner who makes commissions. You can also get bad advice from a fee only planner. However, with the fee only route at least you have some assurance there’s not a conflict of interest.

  12. skittlbrau says:

    Working for a financial services firm, I can say that the FAs here I have encountered are smart, savvy individuals who have the client’s best interest in mind.

    That being said, the minimum investment is half a mill and they are paid based upon AUM – they have a strong incentive to grow the assets.

  13. mac-phisto says:

    two words: index fund.

  14. rugger_can says:

    Think about it this way.. If this guy could accurately predict stocks in any way shape or form he wouldn’t have to show up for his job.

  15. Although there are good, honest, commissioned-based advisors, there are lots of guys who don’t know what the hell they are doing and their only motive is to sell something.

    Buyer beware.

  16. BillyMumphry says:

    i have posted this before but…every (young) FA i have encountered (in my series 7 class mostly) has been one interview away from graveyard shift at ihop. They know nothing that you can’t read off cnn money and asking them to explain it would probably yield a blank stare and some stuttering involving ummm oil and uhh market conditions.

    Ask them to explain a credit default swap, then walk away slowly as they type it into wikipedia.

  17. Miguel Valdespino says:


    Amen to that! Index funds include automatic diversification and some of the lowest possible expenses. It shouldn’t be all of your investing basket, but it can certainly help you out.

  18. ColoradoShark says:

    @rugger_can: Ha! That’s what I always thought. And the same thing goes for all the investment seminars you hear about. If I knew how to invest that well, I wouldn’t tell anyone but my brother. Those guys running seminars know the only guaranteed way to make money in investing is by fleecing people who want to know how to invest.

  19. I’ll do the pitch for a Credit Union (since HomerJay hasn’t popped in yet …):

    One of the benefits I get with my credit union is free financial planning and investment advice. The FPs are paid by the Credit Union. They are not commissioned. They cannot sell products. They do not receive kickbacks. The Credit Union offers no investment products beyond a CD or moneymarket. She (ours is a she) will teach you about the basics of investing, how mutual funds work, etc., or if you’re more sophisticated as an investor, help you sort through the zillions of options and run her nifty calculators for “retirement” or “sending kids to college” or whatever.

  20. Anonymous says:

    Yes, there are good and bad fee-only advisors and good and bad commission based advisors. The other big point that everyone is missing is that, yes, maybe you can put together a diversified portfolio of index funds on your own, but you should NOT put together a special needs trust for your disabled child, or run long-term retirement planning software that you don’t understand. There are needs for a financial advisor other than trying to beat the market! In addition to the websites mentioned above, you can also go to for a free tool to search for advisors by fee type, location and other criteria.