Three Ways You Already Pay for Financial Advice (That You Might Not Even Be Getting)
You may be paying for financial advice and not even receiving it. If you have investments or insurance anywhere, you're paying someone. Just how much you're paying can vary. Let's explore some ways in which you might be paying for advice without transparency.
Through your employer retirement plan: Regardless of whether you work for a large or small company, employer retirement plans often have costs that are passed on to employees. Startup plans in small companies tend to have high internal costs, and unfortunately, there's little you can do to avoid them if you want to receive your company match. In such cases, it's advisable to contribute enough to get the match and redirect any additional funds you want to save to a retirement account like a Traditional or Roth IRA. By setting up an account outside of your plan, you gain more control over your funds and associated costs.
Larger plans available at companies with 100 or more employees usually offer lower-cost investment choices, but this isn't always guaranteed. It's important to review your plan's summary plan description, which outlines administration costs, as well as the fund lineup and its internal costs. You can typically obtain this information from human resources in larger companies or from office managers or owners in smaller companies.
Through your old retirement account: When switching jobs, it's common for people to leave behind a retirement account like a 401(k) or Simple IRA. While your investments may be fine, we've come across numerous plans where an advisor listed on our clients' statements receives ongoing compensation through a more expensive share class of funds, even when a cheaper share class is available. Essentially, they're paying five-star restaurant prices for a three-star meal.
Through your insurance agent: Surprisingly, you're also paying for financial advice from your insurance agent. This includes agents for auto, home, AFLAC, or life insurance. When you purchase an insurance policy or product, the insurance company compensates your agent not only for the initial sale but also for policy renewals in subsequent years. Although you may not consider your insurance agent as someone providing financial advice, they indeed do.
For example, they can help determine appropriate coverage limits for car accidents, the right amount of life insurance in the event of your passing, or ensure you have sufficient funds to cover bills in case of illness or injury. Even though you don't directly pay your agent, their compensation is built into the products you purchase, and it is tied to the amount of money you spend on insurance.
Final thoughts: If you're concerned about potential conflicts of interest, it may be wise to seek guidance from a fee-based or fee-only financial planner who can provide comprehensive insights into your overall financial situation. A fee-only financial advisor, in particular, can review your insurance policies and retirement plans without receiving commission from insurance sales, thereby eliminating any conflicts of interest. However, it's important to choose an advisor who is knowledgeable about insurance contracts so that they can competently advise you. Consider utilizing the services of a CERTIFIED FINANCIAL PLANNER™ (CFP®), as they have undergone rigorous education and training to provide advice on various aspects of financial planning, including insurance.
Investing involves risk, including the potential loss of principal. The information provided in this blog post is for educational and informational purposes only and should not be construed as professional financial advice. Consult with your financial professional before acting on any information discussed in this article and consider all taxes, fees and expenses.
