4 Things Advisors Should Never Say to Clients

Kahler Financial President Rick Kahler agrees that guaranteeing a return is always problematic.

“It depends how it’s framed, and it’s important to say there are no guarantees,” Kahler said in a phone interview. “To tell somebody you may expect a good return over 20 to 30 years if you have a diversified portfolio and leave it alone, that’s fine. But it’s another thing to say you can go to the bank with a 6%-8% stock fund, which Dave Ramsey still stands by today. I’ve taken him to task on that.” 2. “Don’t worry about the cost of this product! You pay nothing.”

“There is nothing wrong with working with a planner or advisor who is commission-based — but every client needs to know how their planner is getting paid,” Birken writes. “If all you hear from your advisor is that you don’t need to worry your pretty little head about payment, then it’s time to head off into the sunset. Because generally the only reason your advisor will harp on the fact that you pay nothing out of pocket is because they want to conceal their sales incentives.”

Kahler noted that every time he writes about annuities, he gets hate email from both advisors and clients who object to his assertion that it’s impossible for the cost of a financial product to be zero:

 “I asked one advisor, ‘who pays you?,’ and he said, ‘the company,’ and then I asked, ‘and who pays the company?’ and he said, ‘it’s none of your business.’ I analyzed one annuity with an annual fee of 7.04% — and yet some people believe they’re ‘not paying anything.’ If someone says there’s no fee, it’s time to run away.” 3. “I can customize a stock portfolio for you.”

The average financial planner isn’t in the business of stock-picking, Birken writes. Even with mutual funds managers whose job it is to pick stocks, she adds, evidence suggests that in many years, passive investing in index funds can beat more than half of active managers.

“Stock picking is not an exact science, and even the people who do it (and nothing else) for a living are wrong about half the time,” she says. “If your advisor tells you she can do this for you, then prepare for disappointment.”

Kahler agreed with Birken, and like her pointed to the value of a good asset allocation strategy.

“I served on the South Dakota Investment Council,” Kahler noted, “and the analysts there followed 150 companies at that time, and they felt overworked, because the average Wall Street analyst followed only 20 or 30 companies. How can one retail broker advise anybody on which stocks to invest in when there are thousands of them? The research leans toward the best choice being a passive strategy in an index fund with periodic rebalancing of the asset allocation.” 4. “There is no risk!” or “You really need to act now.”

Both of these phrases are hallmarks of a hard sell rather than “legitimate advice you could expect to hear from a financial advisor,” Birken writes. “Saying that any particular investment strategy is completely risk-free is an out-and-out lie. All investing involves some risk, and a good advisor will help you to figure out your level of risk tolerance and customize your investment strategy based on what risk you are willing to accept.”

As for Kahler’s thoughts on the hard sell? “There is risk in everything,” he said. “There is risk in putting money in a bank. Maybe you don’t have a default risk, but you have inflation risk. Those are runaway words. Every guarantee costs you something.”

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