Money Magazine Ask the Mole

Beware of free financial advice

Some planners may offer their services for no charge, but that doesn't necessarily mean you won't be paying something.

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By the Mole, Money Magazine's undercover financial planner

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NEW YORK (Money) -- Question: My wife and I are looking into getting some financial advice. Our bank says they offer free services through their financial adviser. This worries my wife because she thinks that the adviser will push the bank's agenda. Is it safer to go with an individual adviser, or is going with one with a bank just as easy?

The Mole's Answer: I'm going to go with your wife on this one. But this doesn't mean that the individual unaffiliated adviser is going to do anything different. Every adviser, including yours truly, has an agenda to push.

Your bank may be very good and you may even play golf with your banker. Make no mistake that a bank is also in business to make money. So if your bank is giving investment advice, you can be pretty sure there is something in it for them. They may not charge you by the hour but they are making money nonetheless.

I've seen banks pull some pretty nasty stuff on their customers. Even credit unions, claiming to exist on behalf of their members, have been known to team up with broker-dealers to sell some questionable products.

Banks and credit unions offer a full range of investment products. What I consider to be abuses fall under two categories:

First, there are the expensive mutual funds with front-end or back-end loads. These pay handsome commissions to the banks and, of course, have a great track record of underperforming no-load mutual funds.

Second, there are the ever-popular permanent insurance policies that come in flavors such as whole life, variable annuities and universal life. These are even bigger cash cows to the banks that partner to sell them.

Unfortunately, you can't conclude that an individual adviser would necessarily be any better. Primarily because many sell the same bad stuff. If fact I've seen the biggest abuses by individual advisers, including some fellow CFPs.

My advice: Don't pick a planner based on whether they work for a large institution or for themselves. First, I'd steer clear of any adviser claiming to offer their services for free. As much as we all like the word "free," and the prospect of obtaining something of value without having to pay for it, there really is no such thing as a free lunch. Your adviser isn't being honest and this is a crucial red flag.

As with banks, you must understand that your adviser is in business to make money. Ask how he and his firm make money from you. The three basic models are commission based, percentage of assets managed-based, and hourly or fixed-fee based.

While I happen to believe in the hourly-based model as having the fewest conflicts, it's important to understand that each of these models has some conflicts which give economic incentives.

Commission-based advisers make more money when they churn your investments. Do you think they would sell you products not economically attractive to them?

Fee-based percentage of assets advisers make more money when they capture your assets. How many would tell you to pay off your mortgage?

Fee-based hourly advisers may also give complex advice to justify the fees. Could some make the client dependent upon coming back regularly?

Make sure your adviser tells you what your total fees will be rather than just how much she makes. And make sure you are paying for something of value. Your adviser can help you build an investment portfolio and assist you with tax planning, risk management and estate planning. Don't pay him to try to beat the market. None of us have a crystal ball.

The Mole is a certified financial planner and certified public accountant who - in the interest of fairness - thinks you should know what goes on behind the scenes in financial planning. Want to make contact? E-mail him at To top of page

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