How to spot the hidden fees and issues that erode its value. The original version of this article was published on tonyrobbins.com.
When looking at your portfolio, there are a few key red flags to look out for. Any of these red flags could mean that you may be with an advisor or firm that has major conflicts of interest and incentives to sell you potentially pricey products that may underperform due to high fees.
Below outlined are 3 red flags that are easiest to spot once you know what to look for.
Paying Commissions, Kickbacks, and Unnecessary Fees
In an ideal world, you would receive unbiased recommendations as to where to put your money. Unfortunately, that’s not how the financial system works for most advisors/agents. Typical advisors receive varying levels of commissions or kickbacks for placing your money in certain unit trusts, endowments or exotic instruments (i.e., structured notes). These kickbacks and sales loads and can take a chunk out of your investment and/or drag down returns each year.
Find out the fees you’re paying by asking the following questions:
- What is the sales fee and management fee?
- Is there an exit fee or any exit penalties?
- What other fees are charged?
Advisors routinely sell “proprietary” funds created by their own firm. They typically carry the name brand of the firm within the name of the fund. It’s a not-so-subtle strategy for keeping fees in the family – a common money-making scheme that depends on clients being naive enough to not ask whether another firm might offer better or cheaper funds.
Find out whether you are getting the best option by asking these questions:
- Knowing my financial goals, is this the best option for me?
- What are my other best options for this investment (even if you don’t carry them)?
- What are the commissions you earn directly or indirectly?
Mismatch of Solutions
Here’s another scheme that’s become increasingly common: a mismatch of solutions with your needs as an investor. This may be in the form of estate planning or life insurance products being marketed as an investment. Or you may be asked to invest in shares in a high risk company or private equity which is unsuited for you. Often appeals to greed with amazing returns or pressure is subtly applied to coerce you to signup.
There are worryingly an increasing number of agents masquerading as financial planners or providing financial planning. In Malaysia, financial planning is a regulated activity requiring both certification and licensing from the Securities Commission. An independent financial advisor has the proper knowledge and is not limited in the investment solutions that he or she can recommend. A good advisor will advise on all the options that are available and allow you as the client to make the decision
Here are a few questions you can ask:
- Are you a licensed financial planner registered with SC?
- How does this investment fit in my overall portfolio and asset allocation?
- Does this investment fit my investor risk profile and investment timeline?
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Are there other red flags to look out for? Share your thoughts with us in the comments.