Watch out for this come-on: Firms that use financial plans to sell more products or move your assets to them. While violating no law, this is questionable.
If advisors in the firm are Certified Financial Planner practitioners, odds are they don’t do this. But some advisory businesses still operate that way. Years ago, there were many more.
Playing this game are both stockbrokers, seeking to peddle products, and fee-only advisors, who want to pump up a client’s assets under management (AUM) so their fees (a percentage of AUM) are higher.
Often, the firm charges a very low price and pushes its employees to sell a certain number of plans each year. The cost does not come close to covering the cost to meet with the advisor, or for the advisor’s company to complete the plan. (The plan gets sent to the financial planning center for the data entry and printing.)
The financial plan might even be free if you deposit a minimum requirement or open an account. At my old firm, advisors had to sign up a given number of people for plans every year to qualify for bonuses and rewards. They were even allowed to buy a certain number and give them to their clients for free in order to meet those requirements.
Typically, the broker and the client get together to fill out a lengthy questionnaire. The broker sends it to their financial planning center for data entry and printing. A few weeks later, a big bound book or binder (100-plus pages) comes back with all sorts of facts and figures.
There is usually an action plan. One such plan details that the client needs more life insurance, preferably high-commission whole, variable or universal. The client’s mortgage interest is also too much, so he should refinance his mortgage, through the firm. The client is encouraged to add check-writing privileges on his stock account, and the client’s investment returns would be better and more consistent if he used one of the firm’s fee-based stock account platforms.
Oh, by the way, the advisor says you might as well simplify your life and consolidate all of your financial dealings under one roof. His. We all want to simplify things, right?
Firms also want their clients to become “sticky.” A “sticky” client is one who stays with the firm for a long time, usually because he has an extensive relationship with it.
If you have all of your financial accounts and dealings at one firm, it is a real pain to transfer your accounts somewhere else. Customers who maintain relationships with one firm for multiple products and services tend to be more loyal, and tend to keep their relationship going for a long time.
Moving a stock account is pretty easy, and people move them to different companies all of the time. You fill out some forms and it takes a few weeks, but it’s not that bad.
Other shifts are not so easy. Moving your checking account to a new bank is a hassle, especially now that most people have direct deposit of their paychecks and Social Security, and pay many of their bills with auto-debits.
Transferring a loan to a new lender means having to refinance it, and you only want to do that if you can get a better rate, or it will cost you money.
Moving life insurance is impossible. You would have to actually replace your current coverage with a new policy, and that may not be in your best interests or even a practical consideration at all.
If you have all of these different accounts, products, and services through your advisor, it will make your relationship very sticky. Someone would have to really disappoint you, or make you pretty angry to end the relationship.
Be mindful that some advisors are not necessarily out to protect your best interests.