You’ve probably heard that when it comes to working with a financial advisor, you should choose a fee-based advisor (meaning one whose compensation doesn’t vary by what they recommend to you) over an advisor who gets paid a commission per transaction. The logic behind this makes sense: an advisor who gets paid per transaction has an incentive to get you to engage in more transactions, and to buy financial products that will pay them a higher commission – neither of which is necessarily in your best interest. In contrast, a fee-based advisor is held to a higher standard, known as the fiduciary standard, that requires the services you pay them for to be in your best interest.
However, you need to be aware that even fee-based advisors are fallible human beings. Just like the rest of us, there are limits to their knowledge, and they’re prone to biases against that which they don’t understand. Based on my experience, here are some things to watch out for when considering a fee-based advisor:
For insurance-related matters, can the advisor refer you to a knowledgeable, independent insurance broker who works with multiple insurance providers? I once met a woman (let’s call her “Fiona”) for whom long-term care insurance was a major priority. (She worked with the elderly and thus had seen firsthand the devastating effects of not having enough money to cover the costs of no longer being able to take care of yourself, which is not something that’s covered by Medicare). She was working with a fee-based financial advisor, but for long-term care insurance, this advisor had referred her to an agent who was employed by one particular insurance company (meaning she could only sell their products), and that company only offered traditional long-term care insurance. For those that don’t know, traditional LTC policies are “use-it-or-lose-it” (there’s no refund for benefits that go unused), and they contain lots of “gotchas” regarding what qualifies as a covered expense, making it difficult to actually receive the benefits you paid for. Now, one alternative to this scenario is to get a life insurance policy with an “indemnity-style” LTC rider. The benefits can be used towards any expense (no questions asked), and when you pass away, any unused portion of your benefits goes to your beneficiary. And despite these advantages, life insurance with an LTC rider tends to be more affordable than traditional LTC insurance. (The company Nationwide (the one that’s famous for being “on your side”) is a leader in the area of life insurance-based LTC coverage.) But the insurance agent Fiona was referred to never even mentioned this alternative, either because she didn’t know about it or because she didn’t want to mention a product that she herself couldn’t sell. When I opened Fiona’s eyes to the existence of life insurance-based LTC coverage, she was in utter disbelief that she’d never heard of it and asked me to teach seminars about it to her colleagues and clients. If an otherwise competent doctor sent you to a less-than-competent specialist, would that not detract from the doctor’s competence as well? However good Fiona’s advisor might’ve been in the area of investment advice, I think we can all agree that said advisor dropped the ball in referring Fiona to that particular insurance agent.
If you don’t have a pension to look forward to and your Social Security checks won’t be enough to cover your basic monthly expenses, an annuity might be a good option for you, because it’s a way to essentially create your own personal pension. It will provide monthly checks for as long as you live, no matter how long you live. In light of this fact, it's a shame that annuities have such a bad reputation. Part of the reason for that bad reputation is anecdotes of agents selling an annuity just to collect a juicy commission, without regard to whether or not it was a good fit for the customer they sold it to. I can't condone such blatant misconduct by so-called financial professionals, but to universally condemn annuities is to throw the baby out with the bathwater. For one thing, there are actually fee-based annuities that don’t pay commissions to the agents who sell them, and don’t charge early withdrawal penalties either. (Typically, these have the word “advisory” or “advisor” in the product name, like Jackson’s Perspective Advisory II or Nationwide’s Monument Advisor.) Second, there may be scenarios in which even a commission-based annuity might serve a person well. (In that case, it becomes a matter of the fee-based advisor referring you to a good independent life insurance broker.) Therefore, I wouldn’t trust a financial advisor (even fee-based) who dismisses annuities out of hand.
In spite of what you may have heard, there are scenarios in which a home equity conversion mortgage (better known as a "reverse mortgage"), which you can get starting when you’re 62, might be a sensible part of your retirement plan. (To learn more about why reverse mortgages are worth considering, and what pitfalls to steer clear of, watch the videos posted here.) A good fee-based advisor should be able to tell you if this is the case for you and, if so, how best to structure the reverse mortgage. Hence, I wouldn’t trust a financial advisor (even fee-based) who dismisses reverse mortgages out of hand.
As you can see, even when working with a fee-based advisor, you still might have needs that require the services of a commission-based broker, so you’ll want a fee-based advisor who understands this and can refer you to someone who will do right by you.
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