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Posted: 6:00 a.m. Tuesday, July 29, 2014

Pay for investment advice or get it "free"?



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Would you rather pay for investment advice upfront, or do you prefer working with an advisor who earns commission based on the investment products they recommend for you?

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Pay for investment advice upfront.

Work with a commissioned salesperson.

I handle my investments on my own.

I don't have any money to invest!

Other

By Clark Howard

ClarkHoward.com


Are you willing to pay for investment advice? Or do you prefer "free advice" from commissioned salespeople? If free is for you, I want you to know that is probably the most expensive "free advice" you'll ever get.

I was shocked by a study I read about via Bloomberg that found the majority of people, by an almost 2:1 ratio, say they will not pay for financial advice. They would rather pay commissions than pay somebody for his or her expertise.

You may think that by not paying a fee-only financial planner that you're getting advice for free. But as I said, that is the most expensive free advice you'll ever get. Insurance salespeople and full-commission stockbrokers are legally allowed to put their interests first and yours second when you work with them.

In legal speak, it's said that they have no "fiduciary duty" to you. In plain language, here's how that plays out and what it means to you: At some point, that commissioned salesperson will be confronted with the choice of putting you in a product that earns them huge commissions but has huge fees for you or putting you in a product that pays them smaller commissions because it has much smaller management fees for you.

Their choice is simple: They do what serves their wallet. The result is that you have less money down the road because you get stuck in the option that has higher management fees and bigger commissions for them.

That's why some countries like England and Australia are exploring or already have moved to outlaw financial commissions.

But that's not yet happened here in the United States. So the only reasonable way I know to deal with this conflict is that if you need financial advice, pay for that advice! You can find fee-only financial planners in your area by visiting NAPFA.org.

It's possible today to buy investments that have ongoing costs of a mere one-sixtieth what you pay ongoing in a variable annuity. Variable annuities are by far the most popular product that insurance salespeople will try to sell you when you go to them for financial advice.

But variable annuities are garbage. They have huge expenses; big fees if you try to bag out before a certain point; and massive tax problems compared to other ways you can invest. But that's what you'll probably be steered to by a commissioned insurance salesperson.

So remember this: Paying people to guide you is money well spent, not money spent poorly. If you are at a roadblock or you don't know where to start, hire a fee-only financial planner and pay them for guidance. "Free advice" that comes from commissioned salespeople is hazardous to your wallet.