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 clients' financial challenges. 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.
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. (see Fact 1)
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.
Not all Bone Collectors are bad. Yes, there are some outstanding, decent-hearted bone-collecting advisors out there. Unfortunately, they often operate under a system that produces Bone Collector behavior. An incentive structure set up to bring in new assets or sell financial products like insurance and annuities (i.e., sales quotas) forces these advisors to exhibit Bone Collector behavior. Even if they speak the language and proclaim their fiduciary duties, the conflict of interest may blind advisors to make recommendations that may NOT be in the best of their clients, even if their hearts were in the right place. This is how good-hearted advisors devolve to become Bone Collectors.
How do I know this? Because:
My financial advisor for 20+ years was a Bone Collector.
Now that I'm on this side of the fence, I have not yet met a financial advisor working under a Bone Collecting incentive structure who brings up ideas to clients that would subtract assets from their books.
I was that well-intentioned advisor who devolved to exhibit Bone Collector behavior under that incentive structure.
Why didn’t anyone tell me this before?
For the record, not all financial advisors operating under the bone collection system are bad. It's just the chances of them bringing out-of-the-box ideas to you are slim to none, especially if they involve taking assets away from accounts you have with them.
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 on your $500,000 portfolio ($5k-$10k annual fee), your advisor should do more.
Similarly, advisors who sell commission-based products like life insurance and annuities are not inherently evil. These products are tools in the financial planning toolbox. They are useful for specific situations, but terrible in other cases. Like taking a screwdriver 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 proper application of these tools, and therefore they may be clouded in their due diligence by the upcoming commission.
Alternatively, a fee-only advisor is paid to solve financial challenges. Although they could also help with portfolio management as a part of the bigger picture, they don’t collect assets with the same vigor and focus as Bone Collectors.
Fee-only advisors do not focus on gathering assets. Fee-only means "paid by client" and "no commission." Thus, fee-only advisors are incentivized to devise thorough strategies that solve clients’ financial challenges, and push products only when it makes sense because they don't receive a sales commission.
So are you currently working with a Bone Collector? Here are some ways to tell if you're working with 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 exhibit Bone Collector characteristics.
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 them? Said another way, do they educate you on the pros and cons of rollovers, especially as you approach age 55, age 59.5, age 62, age 67, and age 72, or do they give you options? There are important reasons why you may or may not want to roll over your retirement accounts as you approach these milestone ages. If your advisor recommends you to roll over with minimal education on why you should or 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 may subtract from his top-line revenue? When was the last time he made a recommendation such as transferring your funds out to buy a home, buy a government bond, or get 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 irks me, but that’s another topic for another “Why didn’t anyone tell me this before?” article. See "Why I Went Independent" to learn about "Selling Away.")
Does your financial advisor help protect your assets? Does he review your home, car, and life insurance policies? Does he review your tax return and give you strategies to lower your taxable income? 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 think twice before working with a Bone Collector due to their potential conflict of interest. They may be fine as portfolio managers, but for similar or less fees, you should find and work with a fee-only REAL financial planner whose goals align with yours.