Finance Wanted.

By Jim Dew

The financial industry must continue to ask itself, "Why does the public needs us?"

I know this question makes many financial advisors feel uncomfortable. But if we do not continue to ask ourselves this question, we could find ourselves out of a job. Why?

Whether we ask ourselves this question or not, others are asking it.

This perennial question of, "Why does the public need stockbrokers and financial advisors" has been raised again by three professors in their paper, "Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry."

In this paper, professors Bergstresser, Tufano, and Chalmers uncovered why consumers pay advisors to choose mutual funds for them. What they found does not reflect well upon the financial advisor community.

Do Financial Advisors Help Clients Choose Better or Better Performing Mutual Funds?

Most financial advisors tell clients that their chosen funds will perform better than direct purchase mutual funds. Unfortunately, Bergstresser, Tufano and Chalmers found the reverse to be true.

They found that investors suffer by paying on average 3.6 percentage points in front-end load fees, as well as higher annual marketing costs in the form of 12b-1 fees. They also found that the financial advisor recommended funds underachieved as compared to the direct purchase mutual funds.

In a recent year, not only did investors pay about $15 billion in sales charges and 12b-1 fees, but they spent an additional $24 billion on management fees. Think about this, these investors spent nearly as much paying advisors to find the funds as they did to the money managers to manage the funds. With this being the case, financial advisors had better do a great job finding funds for their clients.

Did they?

Investors who bought directly from the mutual funds earned almost a half a percent higher than those that had advisor recommended funds. If you took out index funds, the gap was almost two thirds of a point.

But wait there's more!

These differences were calculated before accounting for 12b-1 fees. When included, funds bought directly beat advisor recommended funds by almost a full one point.

So Why Do Investors Use Financial Advisors to Pick Their Mutual Funds and Investments?

The average mutual fund investor is higher educated and wealthier than the average consumer. So it can't be because they don't think they're capable of doing it themselves.

I believe one of the authors of the study to be charitable when he hypothesized that advisors bring a service to their clients by taking the emotion out of investing. Though when you look at the data, it appears that investors using advisors chase short-term returns as much a self-directed investors. And yes, it was found that advisors are as likely to chase short-term returns as anyone.

This study uncovered yet more unflattering details. It found evidence that brokers usually recommend funds with higher loads. So not only do advisors generally not pick the best mutual funds, they also recommend underperforming funds with a preference to higher sales loads. It doesn't take a rocket scientist to figure out why too many advisors do this.

The question is, what as an industry are we going to do about it?

What You Can Do as a Financial Advisor to Change How People Perceive You

Every change starts with one person.

How much research are you doing for your clients? Whether consciously or unconsciously, are you recommending funds with higher fees? Are you providing service equal to the amount of extra fees a client pays for the funds you recommend?

Only you can answer these questions

We are in the information age.

Studies like "Why does the public need stockbrokers and financial advisors" are going to come around, become distributed and get publicized more often. You might as well get used to it.

As financial advisors we need to step up to the plate and start doing the right thing by our clients or we're going to find ourselves out of business, one advisor at a time.

The public does not mind paying fees. What they do mind is an advisor not disclosing the fees. If we think we are worth the fees, then as financial advisors we should feel no need to hide the fees. Instead, we should fully disclose them and explain to our clients why our advice is worth it.

The public knows that we do not have a crystal ball that enables us to find the best performing mutual funds going forward. But the public does become suspicious when all the funds we choose have higher than average expense and sales charges.

There is an ever so slowly growing trend toward full disclosure vs. casual disclosure by advisors in the financial industry. Another movement gaining speed is that of formal fiduciary relationships with clients. Both these movements assure a long and profitable partnership between advisors and their investor clients.

I hope you join me as part of this trend of full disclosure and fiduciary responsibility, for everybody's sake.

About the Author:
By becoming an expert, Top Financial Advisor Coach, Jim Dew MBA, ChFC made over $3MM last year helping financial advisors just like you grow their businesses exponentially. Now, you can take his free quiz and receive an individualized report back within 24 hours detailing your strengths and weaknesses. Then use this report to boost your marketing and profitability to the next level. Take the quiz now at 300financial.com