Unearthing Secrets: The Fascinating World of Bone Collectors
What you need to know before working with a financial advisor
First, here are some facts about Bone Collectors:
A Bone Collector’s job is to collect assets. The more assets they gather, the more they get paid. This model is called Assets Under Management (AUM).
Bone Collectors are not paid based on their expertise in developing plans or solving challenges in clients’ financial lives. Instead, they are paid for the amount of assets they bring in. They also receive bonuses and trips worldwide for the amount of assets brought into the firm. With this incentive model, Bone Collectors focus their growth on bringing in new portfolios, not expanding their financial planning knowledge or skillset to help their clients.
A Bone Collector is not incentivized to be a life-long learner of the financial planning craft. (They may do it independently, but they’re not incentivized to do so.)
A Bone Collector is not incentivized to help smaller-dollar value accounts or proactively look out for and bring valuable ideas to their clients.
(One could argue that retaining clients is in a Bone Collector’s best interest. However, see point #5.)
The more new assets Bone Collectors continue to gather, the more existing clients they can withstand losing.
After all, a Bone Collector’s job is to collect assets. The more assets they gather, the more they get paid.
The old saying, “You don’t know what you don’t know,” is true for clients and advisors alike. If your financial advisor does not have deep financial planning knowledge, they cannot recommend the best solution for your situation. Similarly, if a client doesn’t know what a good advisor is or does, she would take anything that an advisor offers as gospel, thus creating a possible not-in-your-best-interest scenario.
For this reason, you must beware of Bone Collectors.
Yes, there are some outstanding, decent-hearted advisors out there. Unfortunately, they operate under a system that produces Bone Collector behavior. An incentive structure set up to make them bring in new assets, or sell financial products like insurance and annuities (i.e., sales quotas), forces these advisors into becoming Bone Collectors. Even if they speak the language and proclaim their fiduciary duties, the conflict of interest is the plank in their eye that blinds advisors to make recommendations that are NOT in the best of their clients, even if their hearts were in the right place. This is how good-hearted advisors evolve into Bone Collectors.
How do I know? Because:
1) I have never met an advisor under a Bone Collection paradigm who is a true fiduciary
2) I was once that well-intentioned advisor who evolved to exhibit Bone Collector behavior
3) I became a Bone Collector
Why didn’t anyone tell me this before?
Beware of Bone Collectors.
For the record, life insurance and annuities are not inherently evil. They are tools in the financial planning toolbox. They are excellent tools to pull out for specific situations and terrible tools to use in other cases. Like taking a screwdriver out of your toolbox to hammer a nail, while it may work, it isn’t the right tool for the job. Bone Collectors are not incentivized to learn the nuances and the application of these tools in unique scenarios.
If you’re looking to outsource your portfolio management, a good-hearted Bone Collector may do a fine job. However, I would argue that for a 1-2% portfolio management fee, your advisor should do more.
Alternatively, a fee-only advisor is paid to solve financial challenges. Although they could also help with portfolio management as a part of the big picture, they don’t collect assets with the same vigor and laser focus as Bone Collectors.
Fee-only advisors are incentivized to devise thorough strategies that solve clients’ financial challenges.
Bone Collectors are incentivized to collect assets.
Are you currently working with a Bone Collector? Here are some ways to spot a Bone Collector.
Ask them about their compensation structure. If their pay increases/decreases proportionally to the value of the assets they’re managing, they’re a Bone Collector. They operate under the AUM model. If AUM makes up more than 50% of their pay, they’re a Bone Collector.
Ask them if they get paid in trails and 12b-1 fees from mutual fund companies and commissions from insurance and annuity companies. If so, they’re likely operating in a Bone Collector environment. Personally, I have never met an advisor who makes mutual fund recommendations based on the amount of trails or 12b-1 fees they receive. But because they are operating under the commission-based compensation structure, they are likely to exhibit Bone Collector behavior, whether they mean to or not.
Do they almost always want you to roll over your 401k, 403b, 457, TSP to their IRA? Said another way, do they educate you on the pros and cons of employer plan rollovers, especially as you approach age 55, age 59.5, age 62, age 67, and age 72? There are important reasons why you may not want to roll over your retirement accounts as you reach these milestone ages. If your advisor recommends you to roll over with minimal education on why you should not do so, they’re likely a Bone Collector.
Does your advisor call you periodically to check in with you? That’s a good thing. But does he make recommendations to you that do not directly add to his top-line revenue? When was the last time he made a recommendation that lowered his income, such as transferring your funds out to buy a home, buying a government bond, or getting into a self-directed account? If he’s never done that, he’s likely a Bone Collector. (There’s a concept called “Selling Away” in the broker-dealer world, which infuriates me, but that’s another topic for another “Why didn’t anyone tell me this before?” article.)
Does your financial advisor help you to protect your assets? Does he review your home, car, and life insurance policies? Does he review and recommend specific estate planning strategies, such as using different types of trusts for your legacy plans? If your financial advisor only helps you with portfolio management, then you’re likely working with a Bone Collector.
In summary, when looking for a financial advisor to work with, you should avoid a Bone Collector due to their potential conflict of interest. They may be fine as portfolio managers, but for similar fees, you should find and work with a fee-only real financial professional whose goals align with yours.