When choosing a financial advisor, it is very important to understand that financial advisors represent financial institutions. These institutions are the insurance companies, banks, mutual fund companies, stock brokerages, mortgage companies, etc. They are simply the companies that provide the product your financial advisor will be using in building your financial plan. Since financial advisors are heavily influenced by these institutions it is important to know the 4 basic rules by which they all operate. This information will help dramatically when you are choosing a financial advisor.
The 4 rules are:
1. Get Your Money
2. Get It Often
3. Keep It As Long As Possible
4. Give Back As Little As Possible
At first glance this list may seem offensive, like you are under attack by these institutions. In reality, they are simply running a business and trying to make a profit, and if you were in their shoes, you would follow the exact same list. So let’s look at each of these a little more closely and discuss how you can use this knowledge when choosing a financial advisor.
1. Get Your Money
Imagine you opened a bank today. What is the first thing you would need to do to get your bank up and running? You would need deposits, right? And how do you get those deposits? By offering your prospective clients something they want in return for their money.
All financial institutions rely on getting clients to place their money with the institution. All of their advertising and sales are based on attracting people’s money. The financial advisor is part of the sales arm of the institution and his primary role is to get money for the institution.
This is not a bad thing. Done properly, every party in the transaction wins. The institution gets your money to work and profit with, you get a higher interest rate or higher possibility of gain than you had previously, and the financial advisor makes a commission for finding a new client.
Just be aware of that dynamic when choosing a financial advisor. The advisor represents the financial institution and will get paid by them for bringing you in as a client, but he also must be truly acting in your best interests and do what is right for you. A good financial advisor understands that by doing what is truly right for you, he also is doing what is in his own and the financial institutions best interest.
2. Get It Often
Imagine again that you are the bank president. How often do you want people to deposit their money into your bank? As often as possible, and on a very regular basis, right? How do you accomplish this? What if you could create a way where people automatically deposited their money with you every single month on a regularly scheduled basis?
That is why direct deposit and automatic billing were created. It is also why the IRS has automatic withholding for your income taxes. And you thought it was simply created as a convenience for you.
Yes, these things are convenient, but their true intention is to get your money on a regular basis every month without you having to put a lot of thought into it.
Understanding this puts you more in control of the situation when choosing a financial advisor and when working with financial institutions. You do not have to blindly do what they tell you. You can use this convenience to your advantage when you understand its underlying philosophy and purpose.
3. Keep Your Money As Long As Possible
Think like the bank president again for a moment. Once clients have put their money in your bank, when do you want them to take it out? Never, if possible, correct? The longer you, the bank, keep their money the more opportunity you have to make a profit with it.
This is the reason all of your qualified plans (like the 401k and IRAs, as well as many Annuities, and Variable Life Insurance policies) have long withdrawal penalty periods. The qualified plans, with very few exceptions, cannot be touched without penalty until age 59 and a half. It is not uncommon to have 15 year withdrawal penalty periods in the Variable Life Insurance and Annuity contracts.
These long withdrawal penalty periods are in place simply so the financial institution can use your money longer.
Be aware of this rule when choosing a financial advisor. Make sure you know the exit provisions of any financial product you are discussing.
4. Give Back As Little As Possible
Think like the bank president again for a moment. When it comes time to actually return the money to your depositors, how much do you want to give back to them? As little as possible, right? What would you do to discourage them from withdrawing that money in one lump sum, or better yet, to leave the money in your bank even longer? Create rules for withdrawal? Tax it? Penalize it?
The way many of these plans are taxed is designed to keep the money inside the plan for as long as possible, thus allowing the financial institution to keep using that money indefinitely.
Financial Institutions want to keep your money as long as possible. Recently there has been a surge of new ideas and products about passing the money inside qualified plans on to succeeding generations to avoid paying the taxes on the money. Essentially, you leave the money locked inside the plan forever.
Great idea, but for whom?
There you have it, the 4 Rules of Financial Institutions. All financial institutions, and thus the financial advisors who represent them, operate on these rules. They are not necessarily bad rules. When you were thinking as the bank president in each of the examples, you too would have acted in the same manner and followed the same rules.
Choosing a financial advisor is no small matter. Interacting with the financial institutions behind the financial advisor is no small matter either.
If you understand the rules of financial institutions you can use them to your advantage because you know the game they play. You will also choose a financial advisor and products that are in line you’re your goals and ambitions for life.
You must understand and use the 4 Rules of Financial Institutions to create a financial model that truly benefits you.
I am a recovering financial planner. After being in the industry for several years and being very successful as a traditional financial planner, I had an experience in 2004 that changed everything. I lost a big client. Oh yeah, this was a big case. And I lost big time. I was working with a client friend of mine who owned a successful business that was just starting to turn the corner into really big profits. The short version of a long story is that another guy in the industry got the business and blew me away. And he did it using the same products I was trying to sell my friend. He was just using those products, and coordinating them in ways I hadn’t ever dreamed of. The first thing I did after losing the case was to call the other agent and ask him what he was doing. That set off a big learning experience, and now here I am 5 years later teaching my clients the same lessons the other agent used to beat me so soundly with my client. Just financial principles that work. That’s all.