Brian Biros made an $87,000 mistake: He used the wrong type of financial advisor. He was in his 20s, starting to make good money, and wanted to put his extra income to work. One day he got a call out of the blue. The caller’s name was Sam (the name Sam is a pseudonym at Brian’s request) and he was a friend of Brian’s sister. Sam was a financial advisor who was looking to help Brian grow his wealth for retirement.

Brian’s $87,000 Mistake

Sam worked for a major national financial institution. He seemed to really know his stuff. Brian repeatedly described Sam as “a really nice guy”. Sam laid out a couple investment options that Brian could use to invest for his future: 1.) Actively managed mutual funds inside a Roth IRA or 2.) a whole life insurance policy. Brian was in his 20s, without kids, and had no need for life insurance, but the life insurance policy was presented to him as an investment for retirement. Brian naturally asked the expert which is better, Roth IRA or life insurance. According to Brian, Sam “smiled confidently and nodded slowly as he tapped the sheet with the [whole life insurance] numbers”.

Investing in a life insurance policy is a catastrophic mistake. In Brian’s case, he forwent investing in his Roth IRA and instead invested $5,000/year in his whole life policy for 13 years. He eventually did the math on how his insurance policy investment was performing. In total, he had paid $64,000 into his whole life policy (The first year he paid $4K). After 13 years of paying into his whole life policy and never missing a payment, how much did his $64,000 grow to? $61,485. Thirteen years of following the advice of his financial advisor and paying into a policy often pitched as “can’t lose money” and he had lost $2,515. Had he simply invested in an S&P 500 index fund in his Roth IRA over those same years, he would have had a tax-free $148,000.

Brian thought he had hired a financial advisor working in his best interest, but he was actually dealing with a commissioned life insurance salesman. Confusing an insurance salesman for a financial advisor was the mistake that cost Brian $87,000.

A Scary Place

The financial advice industry is a scary place. The seemingly helpful suggestion to “find a good financial advisor” is an invitation into a gauntlet of predatory salespeople and misaligned incentives. Over 99 percent of professionals who bill themselves as financial advisors don’t get paid directly to provide financial advice, rather they’re commissioned salespeople who get paid for pushing specific products or asset managers incentivized to take your assets under management in exchange for a compounding annual fee.

Huge Problem #1: The Labels

The financial advice industry is filled with titles, certifications, designations, and descriptors that could make anyone’s head spin. Financial advisor, financial planner, wealth manager, broker, CFP®, CFA, fee-only, flat-fee, fee-based, advice-only, and fiduciary are a few of the terms consumers are faced with navigating when looking for financial advice. FINRA’s own site lists over 250 different professional designations on their website. (Side note: FINRA and the SEC confusingly share oversight duties for the financial advice industry, adding even more confusion). Insurance salesman Sam proudly lists five such designations in his signature, each followed by a little ®.

Even more concerningly, the term “financial advisor” itself isn’t regulated. Anyone can put that on their business card or office door with reckless indifference to the services they actually provide, just as Sam the insurance salesman did.

Surely, there has to be at least one label that can help direct consumers to a competent advisor looking out for their best interests, right? Unfortunately, such a term doesn’t exist.

What About CFPs?

CFP® (Certified Financial Planner™) is a term coined by a non-profit organization who has taken on the task of separating the good advisors from the bad. Giving credit where it’s due, CFP® is the most recognized professional designation in the industry and in my experience it generally correlates with advisor competency. However, there’s a growing number of the most predatory type of salespeople completing the process to get their CFP® designation. There are also plenty of CFPs who simply aren’t very good or have expensive, confusing, or misaligned business models. 

While the CFP® designation correlates with expertise, there are plenty of fantastic advisors without it, and plenty of terrible ones who have it. Indeed, one of Insurance Salesman Sam’s five designations he lists in his signature is the illustrious CFP®. But that didn’t stop Sam from pushing a permanent life insurance policy on childless twenty-something Brian.

Fiduciaries?

Some consumers idealistically think “fiduciary” is the word that will save them from bad financial advice. Its dictionary definition is promising; a professional who is legally obligated to put the interests of the client before their own. However, there are a few problems with the term. First, legal scholars debate over who is technically obligated to abide by the fiduciary standard, and to whom they owe it. Most agree that the majority of financial advisors actually aren’t bound by a fiduciary standard to the client. Worse yet, in practice I have never actually encountered a financial professional who will answer “no” to the question, “are you a fiduciary?” rendering the term useless to consumers. Even the most predatory of life insurance salesmen happily answer yes to that question, giving false security to an unsuspecting prospect that they’re talking to someone who will operate in their best interest. 

Even those who are legally obligated to act as a fiduciary can be tempted by the commissions offered by the products they sell. As Upton Sinclair famously said, “’It is difficult to get a man to understand something when his salary depends on his not understanding it.” Anyone who makes money by selling specific products has a conflict of interest that directly contradicts the fiduciary duty. That brings us to the next huge problem.

Huge Problem #2: The Business Models

Since there isn’t a label that points us to good financial advice, let’s follow the money. There are four major business models that dominate the financial advice landscape. Which type of advisor you’re talking to isn’t always immediately obvious, but can usually be uncovered with a little digging. Let’s break down the four models from worst to best.

Bad Business Model #1: Life Insurance Salesmen

If you have been thinking “hey, why are you talking about insurance salesmen in an article about financial advisors”, I remind you that the term “financial advisor” isn’t regulated and anyone can use it. And boy oh boy, do life insurance agents love that fact. Northwestern Mutual, the massive life insurance company, proudly calls its 6,700 agents “financial advisors” on its website. It seems, more often than not, when a young investor walks into the office of a financial advisor for the first time, they find themselves sitting across from a life insurance salesman with a “Financial Advisor” name placard on their desk. The salesman may listen patiently to the client’s question, maybe even offer some (possibly illegal) investment advice (because who’s watching), before launching into the pitch on why the client should be buying some sort of cash value life insurance. The pitch is smooth and convincing, and the client walks out a bit confused about what just happened, but often with an expensive and unnecessary life insurance policy that may cost them hundreds of thousands of dollars of future wealth if not worse. That’s exactly what happened to Brian.

It almost goes without saying that if someone is seeking out financial advice and an agent’s most profitable way to make money is to sell insurance, they’re going to sell insurance. It’s the exact opposite of a fiduciary incentive and a setup to provide disastrous advice to investors.

Bad Business Model #2: Commissioned Advisors

These types of advisors, or the companies they represent, make their living by selling investment products. They sell mutual funds, stocks, bonds, REITs, etc. They only have an incentive to give financial advice insofar as that advice boils down to “buy the stuff that I’m selling”.

To be fair, an investor is better off working with a commissioned financial advisor than an insurance salesman because they will generally help you invest in the stock market. But the costs can still be devastating. Typical costs from a commissioned financial advisor can include:

• Front load (transaction fee)
• Trailing commissions
• Contingent deferred sales charges (back end load)
• Revenue sharing from mutual funds

Those fees usually add to 1-2% per year or worse. A 2% annual fee applied over a 50 year investing career will erode 64% of the final investment value.

Worse than the fees, are the incentives. The commissioned advisors only get paid if they sell you their products. They have no financial incentive to provide financial planning services outside of selling their products. That represents a huge conflict of interest that could impact how and whether they advise you on debt, budget, insurance, homeownership, taxes, etc. 

Bad Business Model #3: Assets Under Management Advisors

Assets Under Management (AUM) Advisors are those who transfer your assets to a custodian and manage your investments in exchange for an annual fee. The fee is generally based on a percentage of your investment portfolio value. 

To this model’s credit, it’s better than the previous two. Many advisors you find working under this model are experienced and altruistic. The AUM model does eliminate the blatant conflict of interest introduced by the two commission-based models above.

That said, the AUM model still comes with some huge downsides for most investors.

• Compounding Fees: A typical AUM fee is 1% of assets managed. It sounds like a low number, but it’s charged every year and it compounds with your investments. A 1% fee charged over a 50 year investing career will erode 39% of its value.
• High Minimums: AUM managers generally won’t help those who don’t have a lot of money to invest. There’s usually a minimum of $100K-$500K before they’ll work with you. This makes their services inaccessible to many, and those dealing with other financial issues (debt, budgeting, getting started investing, 401k review, etc) can’t work with an AUM advisor.
• Investing Incentives: Since AUM advisors only get paid if they’re managing your investments, their primary incentive is to not lose a client. Clients are most likely to leave when they see their investments go down. So while altruistic AUM managers may do their best to educate clients on the volatility of the market and the benefit of a long-term strategy, there’s a financial incentive to place clients in more conservative investments, motivated by the desire not to lose them. This benefits the advisor in the short term by reducing client churn during a downturn, but has a steep opportunity cost to their clients in the long term.
• Lack of Advice: For the world of money questions not directly involving investment decisions, AUM advisors aren’t directly incentivized to help. Answering questions like “Can I afford a home?”, “How should I attack my debt?”, or “Can you help with my budget?” don’t fit well into the “we take a percent of your investments” model. Since AUM advisors aren’t paid extra to help with those questions, the advice can naturally suffer. 

To give credit where it’s due, the AUM model works well for some investors (often older clients with large portfolios and shorter time horizons who primarily need investment help). However, the deficiencies above leave the vast majority of investors out in the cold, forced to go without an advisor or work with an advisor whose incentive is to sell, not advise.

The Shockingly Simple Solution

The above three bad business models all have a couple things in common:

1. The advisor isn’t paid directly for their financial advice
2. Advice either isn’t provided or has a conflict of interest

Here’s the shockingly simple solution: Pay financial advisors for financial advice. This model exists. It’s called “advice-only”. Investors may also refer to this model as flat-rate or hourly.

Advice-only financial advisors don’t manage investments, sell products, or earn any commissions. Instead, they’re paid hourly, by project, or on a retainer just for the advice. Advice-only financial advisors aren’t driven by making a sale on a specific insurance or investing product, or a desire to create a “bank of business” managing assets. Instead, Advice-only financial advisors can sit next to their clients as a partner, freely giving true fiduciary advice on topics including investing, credit, debt, budgeting, banking, insurance, taxes, and estate planning. 

The advice-only model solves the two huge problems with financial advice described above. While the dizzying certifications still exist, you don’t need to rely on them when you know you’re dealing with a professional who isn’t incentivized to be earning commissions or building their “bank of business” at your expense. The advice-only model is the only business model that removes the conflicts that have traditionally pitted advisors against their clients.

Problems With Advice-Only

There are those who will point out some disadvantages of advice-only financial advisors. Let’s look at the problems:

• You have to pay for the advice. Yes, sadly, advice-only financial advisors can’t make misleading statements like “the advice is free” or “we make money when you make money”. While it’s bad for the sales pitch, it’s ultimately best for the client to pay upfront instead of via hidden fees down the road.
• No accountability on implementation. Contrarians will also point out that fee-based and fee-only advisors have an ongoing incentive to “implement” their advice, namely make the required trades to invest their client’s money. The implication is that a client will pay for advice, then not act upon it. While that’s a risk, I think consumers deserve a little more credit to act in their own best interest. And, of course, advice-only advisors are more than happy to share a screen with their clients and help click the buttons to actually implement their advice.
• They’re hard to identify. Admittedly, advice-only advisors do operate in the confusing world of financial advisors. And “advice-only” is yet another confusing label I describe above. But advice-only advocate Cody Garrett offers a simple solution. When you meet with a financial advisor, ask if you can pay for their advice with a credit card. Advice-only financial advisors will happily agree. Those who have hidden ways to charge will get uncomfortable and say anything but “yes”.
• They’re hard to find. Admittedly this has been a problem for years, but we now have a solution introduced below.

Where to Find an Advice-Only Advisor

The two huge problems with financial advice have haunted me whenever someone asked me “how do I find a good financial advisor?” I’d explain the benefits of an “advice-only” financial advisor, but could never answer the obvious follow-up question: “how do I find one of those?”. That’s why we built Nectarine.

Nectarine is an advice-only financial advisor marketplace. Clients can search advisors by specialty, compare experience, browse reviews, view live availability, and book directly through Nectarine. Every advisor clearly advertises their flat hourly rate.

Nectarine advisors have nothing to sell. There are no commissions to earn. There are no compounding AUM fees. They don’t take custody of your assets. Instead, you meet with the advisor and pay just for the advice. And yes, you pay with a credit card directly through Nectarine’s site. If you need help with implementation, Nectarine advisors will happily share a screen with you and help you click the right buttons.

Conclusion

The world of financial advice is complex, far more complex than I could possibly describe in this short article. But there is a shockingly simple solution: pay financial advisors directly for their advice. This model is called “advice-only”. This bakes the fiduciary duty directly into the business model, instead of in conflict with it. Investors like Brian would be served well to meet with an advice-only advisor rather than risking the temptation of commissions or annually recurring AUM fees skewing the advice they receive. Nectarine is an advice-only financial advisor marketplace built to solve these problems.

Footnote – Really, 99%?

Yes, more than 99% of financial advisors don’t get paid directly to give financial advice and thus have the conflicts of interest described in this article. It’s worse than that actually. 

According to FINRA, there are over 700,000 registered “Securities Industry Registered Individuals” including about 300,000 financial advisors (individuals who likely describe themselves as financial advisors or the equivalent). Only 11.5%¹ of the registered financial advisors are exclusively “Investment Adviser Representatives” (IARs). That means they’re not directly tied to a financial services company whose products they are incentivized to sell. Sadly, even though these IARs could theoretically charge “just for the advice” the vast majority do earn commissions from selling other companies products or charge a compounding AUM annual fee.

So how many “advice-only” financial advisors are there? “Advice-only” isn’t an official model tracked by FINRA so there isn’t an official record. Advice-only evangelist and expert, Cody Garrett, estimates there are less than 200. Even if we’re generous and double that number, that still leaves more than 99.8% of advisors who have a financial incentive other than giving advice.

When you consider how many of the more than 450,000 insurance sales agents identify themselves as financial advisors, the math gets even worse.

1.  https://www.finra.org/sites/default/files/2023-04/2023-industry-snapshot.pdf – Page 9, table 1.1.7