Today’s clients are better educated and have more information freely available than at any other time in history. It is therefore, in the financial advisor’s best interest to be completely open with his or her clients about the costs of the various financial products that they are offering.
In the past, unless the client was prepared to read the exceptionally ‘fine print’ or knew the right questions to ask, he/she was kept completely in the dark about the costs of financial products. These ‘hidden’ costs were the fees, penalties and, most controversially of all, trailing commissions which drained thousands of dollars from an individual’s investment annually.
The GFC has educated many investors on the finer points of financial advice. For example, a financial advisor who works for, or is affiliated with, a particular insurance company, bank, mortgage company, finance company or brokerage house will exclusively promote that particular firm’s product. Why? Because he/she receives a trailing commission which lasts for the life of the product. How does this affect the client’s investment? The client gets fleeced $1000s per annum from their investment returns. Yes, these fees and commissions would otherwise been deposited into the client’s account.
More alarming is the fact that due to these types of lucrative incentives, the financial advisor was not acting in the best interests of the client. The GFC has highlighted how many investors were sold questionable products simply because they were the products that paid the financial advisor the highest returns and commissions.
A financial advisor who doesn’t provide transparency will end up with egg on his/her face. Today’s clients know where to find information on financial products. They are not as trusting as they used to be and they are well aware of the trailing commission ‘gravy train’. Today’s clients know that they have a right to demand and receive rebates on fees and commissions generated by financial products.
A financial advisor must observe the rules and regulations of transparency when dealing with clients. They must disclose which companies they are affiliated with and which products they are restricted to selling and why. As potential investors, clients have the right to demand complete disclosure (make sure you get it in writing), by the financial advisor of all associated fees, commissions, rebates, default commissions, terms and conditions, and penalties.
If you are still concerned or unconvinced by the information that the financial advisor has provided you with, there is still one more thing you can do as an investor. Go directly to the Product Provider, that is the company supplying the product to the financial advisor, and make a written request for a disclosure on that particular product’s fees and commissions.