Don't Get Sold: Avoiding Fee-Based Financial Advisors

Should you mix investments with insurance?

The answer is almost always, no. When deciding on life insurance, you have the choice of permanent or term. Permanent can include whole, universal, or variable life. All of these have an investment component and typically include a growing cash value. Each of the permanent life insurances are notoriously more complicated than term life insurance and stacked with fees. In almost all cases, it’s best to go with simple and low cost term life insurance and invest the money you would have spent on hidden fees in the stock market.

While term insurance is almost always the best insurance solution, you may or may not be surprised that in 2022, 60.7% of life insurance purchases were for permanent life insurance policies. This most likely has to do with the high commissions received. First year commissions are often 40% to 90% of the life insurance’s premium. These commissions can be followed up with renewal commissions that are often 5-10% of premiums for up to the next 10 years.

Again, these advisors can put on their broker hats, enabling them to step outside of the fiduciary role and sell products that are not in your best interest. How can they sleep with this? John Bogle put it this way. “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.”

Annuities are similar to permanent life insurance in that they are a mix of investments and insurance, notoriously complicated, and charging high and often hidden fees. Again, in almost all cases, it’s best to keep your insurance and investments separate and stay away from these. This is especially true if other tax deferred vehicles can still be contributed to.

Vanguard does offer low-cost annuities. These allow investors who already have high fee annuities to transfer. In order to decide the best time for transferring, the surrender charge for the current annuity should be identified.

You get what you pay for

The past quote of John Bogle made me want to start this section with another of his quotes, "The grim irony of investing is that we investors as a group not only don’t get what we pay for, we get precisely what we don’t pay for.” This implies that the money saved from high fees can instead be invested and return compound interest. Unlike many products and services in life, a higher price doesn’t always provide a better return. In fact, Vanguard performed a study providing considerable evidence that “the odds of outperforming a majority of similar investors increase if investors simply seek for the lowest possible cost for a given strategy.” In the study, it was also found that the most reliable predictor of future performance was the fee, with the lower fee supporting above-average performance. It makes sense!

Loaded mutual funds often seek to provide a high return or a less volatile performance. Front loaded funds can have up front costs to investing in the product, while back loaded funds can have costs for when you want to sell the fund. These costs often translate to commissions for the one selling them. On top of these commissions, almost all of these funds have high annual expense ratios. While the advisors selling you these funds may show some pretty (and often complicated) graphs showing high performance and stable returns, when you take into account the fees and commissions these returns are often dismal compared to index funds of the same asset class.

Similar to loaded mutual funds, alternative investments often carry high fees and commissions. Alternative investments can include commodities, hedge funds, collectibles, and structured investment products. The seller of these alternatives investments may share similar graphs of outperformance coupled with stable returns. Or they take another approach, selling exclusivity. The truth of the matter is that this seller has an incentive of large commissions. The larger the sale the larger the commission, so they want to focus on investors with large portfolios. The exclusivity has nothing to do with. These high fees and commissions usually cut into your return, dispensing a lower performance than an index fund.

Low fees allow for higher returns

A good financial advisor will educate you and help you understand that investing and financial planning can be simple, while providing good returns. In fact, these returns often outperform complex plans and financial products with high fees and commissions.

Fiduciary fee-only financial advisors

While many commission and fee-based advisors may do their best to steer you in the right direction, it’s hard for them to provide unbiased advice and receive commissions. Fee-only advisors do not have the conflicts created by commissions and they are regulated to fiduciary standards. Fee-only advisors who provide a flat fee further reduce conflicts of interest and increase transparency. Flat fees also provide focus on comprehensive financial planning. The financial plan is the biggest value a financial advisor provides. Find a flat fee financial advisor near you, while matching with the best fee-only financial advisor for your needs. Remember all flat fee financial advisors are fee-only and do not sell commissions!