By my count, there are about 20 fee-only investment advisors in San Francisco, California. That is compared to hundreds of commission-based advisors in San Francisco. In the greater Bay Area, we can push the number of fee-only advisors to just about 100, but commission-based advisors are in the thousands. The discrepancy is, unfortunately, for obvious reasons: where there’s a product to be sold, salesmen are in the water. Most salespeople are good people who believe in what they’re trying to sell you. Much of the time, however, financial incentives will affect how an investment advisor manages your money regardless of intentions.
To quote Upton Sinclair: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”
The internet provides an excellent forum for salespeople selling financial solutions. They can create compelling stories about how this specific insurance or that specific investment is the one you need. So, the problem is how to trust the information an investment professional espouses when that person is compensated by selling you a product. The solution is finding unbiased information from different sources, and going with the source that best matches your needs. There are a number of online publications with excellent reputations for helping investors sort though the investing world. And then there are fee-only advisors, who are only compensated by fees from clients. Thus, all a fee-only advisor sells is her service as an investment manager and financial planner and her interest is in providing the best service, not any particular financial product.
The optimal result is that you have enough time, knowledge, and confidence to make your own financial decisions grounded in your research. However, not many people have the time or inclination to manage their own portfolio: that’s when selecting the right financial advisor becomes important.
If a financial advisor works on a commission, that means her income relies upon people buying specific financial products. Most salespeople believe deeply in their products. And here in the San Francisco Bay Area, you can even find products marketed as sustainable or progressive, which can be compelling. The commission-based advisors, for the most part, believe their product is the best option for you, or at least one of the best ones out there, regardless of the preponderance of evidence on the topic. They’re going to rely on sources that affirm their financial product and discount evidence that calls the product into question. This is human nature, and we all do this in our lives to some extent. Recently, research has shown that we tend to do it more when there’s a financial incentive involved.
Fortunately, there is a simple solution to this problem: find a financial advisor who eschews commissions. While you’re never guaranteed to find an investment advisor that is truly unbiased, a fee-only financial advisor is one that earns his income solely based on the fee you pay him, not on commissions from any products he suggests to you.
You’ll want to interview several investment advisors before selecting the one that is right for you. There is a wide enough selection of Bay Area investment firms with a fee-only structure that you should be able to locate an advisor that works for you. Even if you limit your search to a particular city, like San Francisco or Oakland, there are enough choices to give you an adequate search. It means you won’t be selecting from the thousands of commission-based advisors out there, but in that smaller pool of fee-only advisors, you’ll find a much higher percentage of financial advice and management that are aligned to your long-term financial interests.