Where Do You Go for Sound Financial Advice?

My family and friends often ask me for investment tips. My response is almost always the same. Prescribing without a proper diagnosis is malpractice. No two people are identical, just as no two investors are the same.

• What are your financial goals?

• What is your time horizon?

• What is your risk tolerance?

These are just a few of the essential questions that need to be discussed before you can truly get sound investment advice. If someone gives you a tip without asking about your financial profile, run away! Be very careful whom you listen to!

So, where do you go for reliable financial advice? An insurance agent? What do insurance agents sell? Insurance products. Are insurance products the right investment for everybody? Of course not. Most of these agents can’t recommend or sell stocks, bonds, or mutual funds. What happens if stocks are the best solution for your investment needs? The agent will still try to sell you insurance products because that’s all they can offer, regardless of whether or not they’re the right products for you. This is clearly a conflict of interest.

Beware especially of the “captive agent.” That’s an insurance agent who works for only one company, which means he or she can only offer insurance products offered by a single company, regardless if they are good, bad, or just plain ugly. Having an insurance agent come to my home to do a sales presentation is not my idea of a fun-filled evening. I am reminded of a scene from my favorite Woody Allen movie, Take the Money and Run, in which Allen’s character is sentenced to ten years in solitary confinement with an insurance salesman. Pretty harsh, don’t you think? That’s clearly a violation of the 8th amendment—cruel and unusual punishment.  

If you need insurance, buy it from a good, reputable agent and company. If you need investment products, go elsewhere.

What about banks? Banks sell CDs, annuities, and some offer mutual funds by licensed sales people. Who are these people sitting behind the desk offering investment products? Here’s my take: The average Wall Street salary is just shy of $400,000 a year. The average pay for a bank employee is somewhat less than $400,000. So, why are these investment people working at a bank instead of a major Wall Street firm making a lot less money? Because most are below average. Some of these folks were bank tellers who were encouraged to get a mutual fund license (Series 6) despite the fact that they had no prior investment experience. Getting a Series 6 license is pretty easy, but getting a license doesn’t make someone a pro. I have a driver’s license, but I am not a professional driver, nor am I qualified to enter the Indy 500. Be careful! If I were licensed to sell only mutual funds, what am I going to try to sell you? A conflict of interest, wouldn’t you say?

A very large misconception about buying mutual funds and variable annuities from banks is that by doing so you are getting FDIC insurance. That is simply not true. Investment products are not insured by the Federal government or anyone else for that matter. Therefore you run the risk of losing money. Unfortunately, banks often forget to disclose this minor detail.

Another pitfall of buying mutual fund from a bank is that most banks have limited selling agreements with mutual fund companies. In other words, banks can only offer you a minimal amount of mutual funds. I would rather make my investment selections from the entire fund universe rather than limit myself to just a couple of options. I urge caution before buying investment products from a bank. They work on commission, and you pay a fee (hidden or otherwise) whether or not you make money. These sometimes ethically-challenged sales people are neither financially responsible nor accountable for the advice they give you. A word of advice: No matter who you end up working with in the investment field, make sure they have at least ten years experience. It takes that long to become a seasoned professional. Don’t let a novice cut their teeth on your life savings. Please forgive me for adopting a tone of righteous indignation, but for the uninitiated, investing with a rookie can be an easy way for the gullible and imprudent to lose their hard-earned money.

How does working with a stockbroker sound? To say their interests are the same as yours would be a lie. A broker who receives a commission for every trade is acting in conflict with your best interests. Here’s how the game is played: A stockbroker sells you 100 shares of IBM because the firm’s analyst thinks it’s a good buy. A few months later, the broker’s mortgage payment is past due, and he needs to make a sale/commission sooner rather than later. Your broker calls you and says, “You know, that IBM stock that I sold you has done really well. Why don’t we sell it, take the profit, and buy Southwest Airlines? I think it’s ready to take off.” You take his advice because, after all, he’s the expert. What just happened? You paid your broker three commissions. One to buy IBM, one to sell IBM, and another to buy Southwest Airlines, which you will end up selling some day when his kids go off to college, granting your Wall Street wizard a total of four paychecks. Or, on the other hand, if IBM goes down instead of up, your broker calls and says something like this, “You know that IBM stock you bought a while ago? Sorry it didn’t work out for you. The analyst who recommended the stock is no longer with our firm. Our new analyst is awesome, and she is recommending Southwest Airlines. Why don’t we sell IBM and cut your losses and buy Southwest before it hits new highs?” Either way, whether you made more money or not, the broker ends up making moolah four times. Never forget, they don’t get paid to make you money; they get paid to sell investment products. The more they sell, the more money they make. To repeat—brokers are not on your side.

By the way, the broker comes from the Saxon “broc,” which means misfortune.

The Oxford dictionary tells us that between the years 1377 and 1690, the word “broker” means, among other things, a procurer; pimp; bawd; a panderer.

Here’s something else to ponder. It only takes four to five months to become a stockbroker. It takes six months for a beautician to become licensed and two years for a plumber to become certified to unclog your toilet. That’s frightening, wouldn’t you say?

Warning! Anyone can call him or herself a financial planner. It’s a title, not a professional designation. A banker, insurance agent, or stockbroker can call him or herself a financial planner or financial advisor. Calling somebody something doesn’t necessarily make it so. According to a study done by the Financial Planning Association, 46% of “financial planners” have no retirement plan. That should tell you something.

My first—and only—experience with a “financial planner” was back in 1985. I had an appointment with a guy who worked with IDS, which was bought by American Express and later spun off to become Ameriprise Financial. I wanted to open an IRA for my wife and myself in a mutual fund. The so-called financial planner convinced me to invest our IRA money into a limited partnership instead of mutual funds. I figured he knew more than I did because he was a “financial planner”! As it turned out, it only took my expert planner a couple of years to lose the entire investment. I just took a couple of minutes to calculate how much our $4,000 IRA money would have grown if it had been invested in the S&P 500 index over the past 3.3 decades. Sad to say, it would have worth just shy of $100,000 today.

Any way you look at it, nothing is more difficult than succeeding in the investment arena, and yet so many poorly-trained individuals make the attempt. As far as I am concerned, it is nearly impossible for ordinary investors to outperform the market because there is so much competition.

So where do we turn for expert investment guidance? Let’s explore what a registered investment advisor (RIA) is and what they do. RIAs are fiduciaries and held to a higher standard by the U.S. Securities and Exchange Commission (SEC). They are legally and ethically required to put the client’s needs above their own at all times. A fiduciary is a person to whom property or power is entrusted for the benefit of another. An RIA is paid solely for advice, accepting no commissions for investment products. There are no conflicts of interest; both the client and the RIA sit on the same side of the table with their interests aligned. In contrast, commission driven sales people (bankers, brokers, and insurance agents) are not fiduciaries; they are not held to the same legal standards as RIAs. Most RIAs are independent, which means they are not tied to any specific family of mutual funds, exchange-traded funds, real-estate investment trust, or any other investment products. They can do their own research and recommend what they consider to be the very best opportunities for their clients.

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Thanks and Blessings!