Five Lessons Learned from a Year in Financial Services

It seems like there is a never-ending list of things to look out for and protect yourself against. Gluten, tanning beds, drugs, bad investments, pseudoscience, and identity theft all warrant varying degrees of paranoia and concern.

But I’ve learned another one that you may not be aware of. You could take financial advice from the wrong person. Below is my story, at the end are the key takeaways.

Disclaimer; Everything you read below is my opinion and story. Nothing you read is intended to represent specific advice to implement in your own personal finances.
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I started as a financial representative for a large financial company right out of college. After approximately 3 months of training, I was sent out into the world to start acquiring clients that would eventually sustain my own financial services practice.

When a family friend, whom had been in the business over a decade, learned that I would be starting my own practice, he was quick to offer two pieces of advice. First, “treat everyone you sit down with like they are your mother and father”. Second, “the first three to five years are rough. After that, you’re in the clear.”

He was definitely right about the second part. The business model for a financial services practice is really simple. You live on the commissions from every financial product your clients buy. Financial products fall into two different categories insurance (life, disability, long-term care, annuities, etc.) and investment accounts (IRAs, 529 plans, brokerage accounts, and more).


Different families of products require representatives to earn different licensing enabling legal brokership of a sale. The more tests passed, the more products you offer and the more money you can make.

I passed my Life, Accident and Health Exam in May of 2014, allowing me to sell insurance products in the state of Pennsylvania. I would pass the series 63 and series 6 exam by January 2015. I found more than 20 clients in my first 6 months, above average for someone just getting started, and received lots of encouragement from my managers.

But I could not shake the feeling that something was not right. The reality of living off 100% commissions left me unable to shut off the sales side of my brain. I started seeing family members, friends, teammates and acquaintances as little more than potential clients.

The incentives of selling insurance versus the value of helping my clients was further perverted by the language of the laws regulating my behavior. My licensing required that I abide by a suitability standard.  This meant I had to be able to prove a recommendation I made was suitable for my client at the time of the sale and kept diligent case notes.

Sounds good right? The reality is that the suitability standard is a woefully neutered protection. What many clients need is a fiduciary to look out for their best interests.

The difference between suitability and fiduciary is summed up simply: an advisor acting as a fiduciary, must act in the best interest of the client and put the interests of his/herself below those of the client. A suitability standard requires no such decency, instead insisting that the advisor's recommendation be reasonably suitable for the client while not guaranteeing that the client’s interests hold supremacy over the advisor’s.  

Brokers who are only limited by suitability requirements are free to put their clients into higher fee investments that garner a higher commission for the salesman. A Charles Schwab disclosure neatly sums up the situation: “Schwab may pay a Schwab representative more for selling products or services on which Schwab makes more money.”

Many people think this is ridiculous and have petitioned Congress to protect people from this behavior. Wall Street is fighting to preserve the status quo and stop legislation requiring a fiduciary standard for everyone in the financial services industry offering advice.

Wall Street has deployed an army of lobbyists to fight the bill, claiming that the increased costs associated with a uniform fiduciary standard across the industry (compliance reporting and time associated with advisors doing appropriate due diligence on potential clients) would make financial advice too cost prohibitive.

While a fiduciary standard may not be the only solution, as Michael Kitces argues, at the very least, salespeople and fiduciaries MUST be labeled differently. Someone should not be able to call themselves an advisor if they are not putting their clients interests first.

What you definitely do not want is an advisor who is fighting to keep his compliance department out of his business. You should also know when you are talking to a salesperson.

Where did these realizations leave me? I feel the industry is ripe for disruption from tech start-ups like Wealthfront and Betterment. These businesses have already acquired over $1 billion under management, predominantly belonging to tech-savvy millennials. Their primary advantage is that they can charge SIGNIFICANTLY lower sales charges to investors, which have a huge impact on long-term gains.

I did not want to spend the next decade or two fighting for scraps with such companies.

Will advisors go the way of Blockbuster, Borders, and Kodak? Probably not overnight, but the new players are going to eat unprepared firms’ lunches and steal a lot of the pie.

The millennial generation trusts people less and technology more than any previous generation. Generation Z will only continue that trend.

I feel like I have just enough information and experience to give some advice to my peers if they come to me. If I do not know, I will happily direct them to resources and bloggers that can provide better guidance.

Don’t get it twisted though, I have learned some useful information about financial planning. Here is what I am implementing in my own financial life moving forward.

1. I opened a Roth IRA through an online brokerage that invests in low-cost index funds. When investing, I am going to focus on avoiding big mistakes, rather than hitting home runs with every move.
2. I will not panic and take my money out the next time the market crashes, which will happen again. I will stay in the market because a long term perspective reveals that temporary dips in the market do not affect long term gains. 
   
3. I will continue to include investing and finance books in my reading list and heed their advice as I construct my personal portfolio. 
   
4. When I do seek advice, I will make sure that my advisor is a fiduciary, with many years of experience and he has earned a CFP designation. I will always remember to ask him how he gets paid on every product he recommends and what his own financial plan looks like.
   
5. I NEVER carry any credit card debt by paying my balance EVERY month. Credit card interest rates are insane and your credit report can affect your ability to get a job and buy a house.

If you agree or disagree, start the conversation below in the comments.

Disclaimer; Everything you read above is my opinion and story. Nothing you read is intended to represent specific advice to implement in your own personal finances.