Investing with a Broker or Financial Adviser

Once upon a time in a distant galaxy, people trusted their life savings to brokers and financial advisers who always made investments according to their clients' needs and wishes, never thinking of per-transaction fees. When people needed to plan for the future, they put their faith in financial planners who were highly competent and recommended only the most appropriate products no matter what rip-off insurance policies and other vehicles their companies were trying to push.

But these people were definitely not living in the United States in the 21st century.

Now, ladies and gentlemen, back to reality. In this world, you have to be a highly informed consumer before you start seeking financial advice. So-called "experts" are hanging out shingles everywhere, some of them just to take advantage of people in trouble.

Here is something you must always keep in mind: When a financial professional is advising you, he or she is being remunerated by the amount of product sold and frequency of selling. Doing well for you is not necessarily this person's prime mission in life. The smart pros don't want to burn you because they don't want to lose you as a client, but they have some powerful incentives—such as hanging on to their jobs—to sell you a lot of things that you might live very nicely without.

Such as? Here are a few products that you don't need:

• "Investment" insurance policies.
• Home equity lines of credit to get you out of some other form of debt.
• Adjustable-rate mortgages (ARMs) when you plan on being in a place for a long time, so you "can afford to buy" more house than you can really afford.
• Mutual funds, stocks, or bonds that a broker needs to sell because if he doesn't meet his quota of products sold for the month he'll be fired.

Believe it or not, there are brokers who regularly read the obituaries, looking for rich men who have died. Then they call the widow with some "trust me with your investments" spiel to get their hands on the money she has inherited. A savvy widow will find her own broker, or invest her husband's estate herself in investments that she understands.