Welcome to Lesson #3 of "5 Big Ways Your Financial Advisor May Not Be Acting In Your Best Interests"

Setu Mazumdar, MD, CFP® The Financial Planner For Doctors

Setu Mazumdar, MD, CFP®

The Financial Planner For Doctors

Overview: There is a game that financial advisors like to play, but unlike playing a game for fun, this game can cost you a boatload of money...money you've worked incredibly hard for.
I'll call it the "Mutual Fund Game." If you're part of this game, your financial advisor might not be acting in your best interests.

Suppose you just hired a financial advisor and suppose upon transferring your portfolio to the advisor’s firm, your advisor tells you that after thorough research he uses only the best money managers. He invests your money in 20 different mutual funds, including the following:

Allianz RCM Technology A
Alliance Bernstein Wealth Appreciation Strategy B
American Funds New Perspective Class C

He tells tells you that he needs to diversify your investments so he invests some of your money in a real estate holding company and another fund called a unit investment trust (UIT). Your advisor also touts the benefits of tax deferral especially since physicians have high income so your advisor puts some of your money into variable annuities which defer tax on investment earnings.

The Bait and Switch

One year later you meet with your financial advisor again to review your portfolio. He says that based upon his firm’s research analysts and economic forecasts, he feels it’s necessary to switch most of his mutual funds from the current funds to different funds since it’s likely that the new funds will outperform.

These funds include the following:

PIMCO Total Return Class A
Fidelity Advisor Overseas Class B
Pioneer Cullen Value Fund Class C

You might feel like your advisor is doing a good job by being proactive with your investments and you like the tax strategies he’s using. You’re reassured that your advisor and his team of analysts are constantly monitoring money managers and the economic data.

Oh how wrong you are! Your advisor might just be playing a game and you might be the pawn.

Imagine your next acute MI patient. What if you had a choice of 2 drugs to give the patient: Drug A is more effective but you get paid less if you choose it, and Drug B is less effective but you get paid more if you choose it.

What if your income is tied to the drug you give? You might think you’re high and mighty, but let’s face reality: you would at least think about giving the drug that pays you more right? If that’s the case then you’re not really treating the patient or acting in the patient’s best interest. You’re just pushing products to pad your wallet.

You don’t practice medicine that way, but that’s exactly what many financial advisors do with your investments. They’re simply salesman that get paid via kickbacks (commissions) from mutual fund companies and insurance companies. Now think about this for a minute: these advisors might not be providing you with any actual advice. They might be selling you stuff for the commission. Yet they mask this under the guise of fancy offices, meaningless titles, and the illusion of effort to make you think that the investments they’ve “discovered” are appropriate for you. Their allegiance is NOT to you--it’s to the products they sell you and the firm they work for.

It seems like many financial advisors I meet -- especially the ones that do not act in your best interests -- have fancy sounding titles like “Vice President of Investments.” The problem is that a bunch of other advisors have the same title. It means nothing.

Here's The Typical Scenario

The advisor spreads out your investments among numerous different mutual funds, giving you the illusion of diversification and sophistication.

Typically these are either Class A, Class B, or Class C share funds, or variable annuities. What that means is that the advisor is getting a kickback for selling EACH fund and for the product vehicle itself (such as the annuity).

For A shares that kickback comes when you buy the fund and for Class B or C share funds the kickback comes when you sell the fund years later.

But, as they say, it gets worse.

You see there’s typically a hidden kickback--called a 12b-1 fee--that’s paid every year after the sale to the advisor.

So you get hammered on the front end and then slapped on the back end. But what’s downright ugly about all this is that you won’t ever be aware any of this is happening because unlike getting your electricity bill in the mail, you’ll never get a bill for this.

Instead this is taken right off the top of your investment. As an example if you have a $500,000 portfolio and it’s spread out across 20 Class A share funds, and the commission is 5%, then you’ve automatically lost $25,000 and have only invested $475,000. You’ll never know it but you’re definitely paying it.

Think about this: what if there are investments that do NOT pay the advisor a commission but are more appropriate for you and cost less. Do you think that a commission based advisor will tell you about these investments? That’s about a slim a chance as the government giving doctors complete immunity from medical malpractice lawsuits!

Just who are these advisors? Try the ones from all of the following: banks, brokerage firms, insurance agents who sell investments via annuities and life insurance, and even so called “independent” and “fee based” advisors from the independent broker-dealers. In other words, a lot of them.

Check out some mutual fund families and products that might pay your financial advisor a commission (you'll have to find out for sure and this is not a comprehensive list):

Commission based products

If your advisor has invested your portfolio in these mutual fund families or products, you might be getting kicked and your advisor might be getting a nice kickback!

The Game Must Go On

Once an advisor sells you a fund, usually it’s game over--at least as far as advice is concerned. At this point there’s no incentive for the advisor to provide you with anything since he doesn't get paid unless he sells you something. So the advisor has an incentive to sell you more mutual funds down the road...and the game begins again.

When you have new money to invest, a commission based advisor might sell you another fund that’s different than ones you’re already invested in. Or if you don’t have new money to invest, periodically you might get a pitch to switch your current funds to other funds that offer the potential for higher returns. How do you really know if he’s making a switch just to generate another commission?

But there’s one more game you need to be aware of. Mutual funds which pay commissions have what are called “breakpoints.” The more you invest in one fund, the lower the commission. Typically this happens every $25,000 to $50,000 in a commission based fund. The problem is that from the advisor’s perspective there’s no reason for him to give you this breakpoint. It’s better for him to spread out your money across many different funds so you pay an overall higher commission. And why not? You’ll never know--you’re too busy with seeing patients and you probably don’t pay attention to your investment statements--honestly do you even read your statement beyond the first page? Do you even open the envelope?

If you have an advisor you need to know whether you’re part of the game and whose side your advisor is on. Look at your statements, figure out whether you have any commission based products, and find out exactly what you’re paying and why your advisor chose those investments.

Your Next Steps:

1.  Look at your past 2 years of investment statements

2.  List all the mutual funds you currently own and flag the ones labeled as class A, class B, or class C shares. Why did your financial advisor sell you these funds instead of lower cost alternatives?

3.  Determine if your funds have changed over the past 2 years. If so, why have they changed?

Stay tuned for the next part of this report coming your way soon.

If you want me to review your investment and retirement portfolio and see if you're part of the "game" and how you should really be managing your investment portfolio set up your FREE Financial Coaching Session with me:

Talk to you soon.

Making Work Optional For Doctors,

Setu Mazumdar, MD, CFP®

The Financial Planner For Doctors