That conversation is one I'll never forget.
"Son," he said with a slight chuckle, "In this business, there are three people that need to make money. The home office, the financial advisor, and the client. But listen, two out of three ain't bad."
I was a brand new financial advisor for one of the largest brokerage firms in the nation. This "wisdom" was coming from a top-producing veteran advisor. Since he was very successful, and I was new, I was asked to shadow him for a while to learn how he did things. I'll have to say, I did learn a few things. More than I expected or wanted to learn.
I knew that it was a sales job when they hired me. It was clear that I would be expected to produce revenue and generate a profit for the firm. I didn't have an issue with any of that. What bothered me was what I had to do just to meet their sales quota.
This quota was relentless and always increasing. It went above the number required to cover my office's expenses and generate a moderate profit. They wanted big profits. Every month!
After experiencing this industry from the inside, I'm convinced that one of the most important questions you can ask your advisor is, "Do you have a sales quota?"
There's a lot of reasons you should know the answer to this. Here's two of them.
If your financial advisor has a corporate sales goal, you should clearly understand that their job is constantly at stake if they fail to generate the required revenue. This means that there is the potential for your retirement account, and the commissions generated from those dollars, to be what stands in the gap between your financial advisor keeping - or losing - his or her job.
During the eight years I spent with that big name firm, achieving the corporate sales goal was never much of an issue for me. However, it was always on my mind. I was driven to success by the fear of not meeting my monthly goal. Why? I saw what was happening to the financial advisors who would get behind and couldn't meet the sales goal. While it was never an overt home office directive, the unspoken message to these failing advisors was, "Sometimes you have to choose between doing what it takes to survive and feed your family...or do what's right for the client. Go sell something!"
I know you probably love your financial advisor. But how confident are you that your interests will be placed as top priority if your advisor is forced to choose between selling you something you don't need or getting fired? I hope your confidence is not too high.
I also hope you don't automatically assume that this doesn't apply to your financial advisor because they've been in the business for several years. Typically, financial advisors who have been in the industry for several years usually don't have an issue with these goals. But some do. And here's the problem. There's no flashing lights on the office door of an advisor who is struggling to keep up with an increasing sales quota. You have no way of knowing if your advisor's job is in jeopardy from not hitting the corporate sales goals.
The next time your financial advisor tells you about a great family vacation, ask them a simple question. "Who paid for it?" Chances are, it was the firm that employees him. Those big companies aren't just giving those trips away though. Not hardly. They have to be earned by hitting certain sales goals.
But these aren't your garden variety broad sales goal. These goals are usually very specific. For example, the advisor may need to generate a certain dollar amount of revenue, but only the revenue from specific product areas will count. It could be annuities, growth stocks, bonds, or banking products such as credit cards or margin loans.
Imagine for a moment that you're a fly on the wall in your financial advisor's office. He's just received his standings for the current trip promotion. He's almost there! All he needs is another $3,000 in commission on annuities and his family can travel to New Zealand for a week of diving and exotic beaches.
His phone rings. It's a client that has some money to invest. The client wants to know what the advisor would recommend?
What do you think he'll recommend...maybe an annuity?
I think just the presence of the incentive makes the temptation too great and opens the door for financial abuse.
Needless to say, I don't like sales quotas and contests that are based on how much revenue can be generated on your investment dollars. I think it presents a tremendous conflict of interest and generates biased advice.
If this incentive arrangement bothers you as well, it may be time to find another financial advisor. You owe it to yourself to get one one who doesn't have a carrot constantly dangled in front of his nose. There's only one place to find an advisor like that. And it's not at a big brand name firm. You'll need to look for an independent advisor.
Preferably, find an advisor who will offer his services to you on a fee basis. It doesn't eliminate all conflicts, but it takes care of a lot of them.