4 Mistakes People Make While Seeking Financial Advice
Mistake # 1: choosing a salesperson instead of an independent professional with a fiduciary responsibility.
According to Registered Representative Magazine, salespeople in the financial services industry earn on average $175,000 to $200,000 per year. It’s not uncommon for financial advisors to earn millions annually.
Though many advisors may claim to have your best interest at heart, you actually fall to the third slot on the totem pole of many advisors:
1. Your advisor’s interests
2. His or her firm’s interests
3. Your interests
The Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) govern brokers and investment advisors. However, the odds of an advisor facing daily conflicts of interest are as common you spotting a Toyota while running an errand.
Conflicts are so widespread and entrenched on Wall Street that all attempts at reform have failed. The backroom deals, commission incentives, payments for shelf space, etc are happening as you read this. Advisors are often “glorified salespeople” who have one goal: make as much money as possible. Most have no fiduciary responsibility so the prudent rule says they can invest in anything as long as it does not harm you. So the advisor is free to sell you a variable annuity with a 10 percent commission. Your cost? Five percent annually in fees and by the way you can’t sell it for at least ten years or you’ll pay huge penalties.
So in essence, they are not bound to act solely in your best interest. With commissions on the line, many sales people will act in their own self-interest, justifying the product with the highest commissions. With two identical product choices (one paying a 7% commission, the other 4%, which do you think the advisor would choose?)
From a legal standpoint, an advisor is only required to avoid selling you an “unsuitable” investment product. This meets a very minimum standard. There is no requirement to act in
your best interests or as a fiduciary on your behalf. Additionally, they don’t even have to disclose any conflicts of interest that may exist. Talk about a bum deal for you!
Mistake # 2: Listening to the media
Money magazine, Fortune, USA Today, CNBC’s Jim Cramer, Forbes, you name it; they are all there to entertain! Let me repeat this they are all there to entertain. This means sell you something! If you don’t tune in, buy from their advertisers, and continue to frequent them regularly, they go out of business. Bold headlines, irrational advice, entertaining news, sensationalized stories…it must capture your attention.
How poor is the advice from the media? In 2000, Case Western Reserve University conducted a study showing that investors who follow media recommendations lose 3.8% of their money in the following six months after the recommendation. So why do so many people blindly follow the media’s investment advice? Predictions made about sports, weather, and Wall Street make good conversation pieces, but poor investment strategies!
Mistake # 3: Listening to friends and family talk about “what’s hot”
Since 1990, we’ve seen investing fads come and go. In the 1990s it was technology stocks, followed by real estate, and then it became oil and gold, then emerging market countries like Brazil, Russia, India, and China. Today many flock to any form of green or environmental investing. Investment fads are only in vogue until everybody knows about them. Once they become cocktail party conversation, financial magazine material, or an internet sensation, the fad is as good as dead on arrival.
I remember late in 1999 when I received a call from one of my beloved clients Molly. Molly was in her mid-80s and a very conservative investor. She was wondering if she should sell many of her dividend stock investments and put them into an Internet mutual fund. I asked Molly about her nearly 30% return from the prior year. Was she not happy? She said she had a friend (and everyone has one of these friends) who made over 100% the prior year in an Internet fund. After explaining the risks, and discussing her personal situation, I talked Molly out of investing in the Internet fund. Not that I had a crystal ball or anything, Molly had no place being in the internet.
Normally a fixed income and dividend stock owner, this would have taken her risk level from a 4 all the way to a 10. Molly took my advice and we all know how the Internet story unfolded. I don’t always claim to get it right when it comes to trends or predicting short-term movements in the stock market, but what I can spot are troubled signs that a strategy is headed for disaster. Human nature drives people to invest in fads only after prices have already risen. This means those late to the game are the most apt to get hurt. We only hear about a trend after people have already been successful making it less and less likely that you can follow their success. Instead, you need to figure out how to buy low and sell high. Here’s a hint: investing in fads is not the way!
Mistake # 4: Listening to your co-workers
Too many people put too much in their own company’s stock or take too much advice from co-workers. When it comes to investing, many turn to the well known well established companies. After all they can’t fail? Wait, Enron, WorldCom, Lehman Brothers, and Ginnie Mae to name a few, were giants who became extinct just like enormous dinosaurs. Bigger is not always better! In fact, much of the growth for many companies takes place within the first few years of operation.
Bloomberg provided further proof that the largest companies aren’t always the best. Their publications (as of December 31, 2008) show that 49% of the companies in the S&P 500 (largest, most widely known companies) had lower prices in 2008 than in 2000. In fact Merrill Lynch lost 78% in 2008, AIG lost 97%, Fannie Mae lost 98% Freddie Mac lost 98%, while Wachovia lost 85%. Still not convinced?
From 2000 to 2002 GE lost 53%, from 1999 to 2005 Coca-Cola lost 40% within seven years, from 2000 to 2002 McDonald’s lost 60% in three years, even trusty old Wal-Mart lost 37% from 2000 to 2007 (a 8 year span). These are some of the largest companies in the entire world. If they can lose almost half or more of their value within a relatively short period of time, biggest isn’t always best!
Don’t get me wrong, large company stocks have their place in a portfolio. My point is just don’t assume that if you buy the biggest and best companies you will profit. As they say “timing is everything”.
In order to truly understand an investment opportunity, much homework is needed. You should evaluate a company’s financial potential by looking at a wide number of financial data available at sites like www.Morningstar.com, www.valueline.com, www.zacks.com, and Yahoo Finance to name a few.
Where do you turn for financial advice?
So where do you turn? Rather than running from advisor to advisor, changing accounts from firm to firm, or seeking a savior, other than The Savior Jesus Christ, it starts with your education. You can’t expect someone else to bail you out of trouble. It all starts with you! You have the power to change your financial future if you are willing to put in the time, energy, and effort.
There is no one-size-fits-all solution. Truth being, there is no shortage of good ideas: Stocks, bonds, real estate, options trading, commodities, exchange-traded funds — there are dozens of ways to invest. Chances are you’ve probably tried some or many of these options. How successful have they been? If those ideas made you rich, why are you reading this book?
Your education is the key to your future success. If you want to grow your wealth, you cannot keep doing the same things you’ve done in the past and expect different results. You probably tried a lot of ideas with little to no success. This is okay. In fact better than ok, it’s perfect! This is perfect because you’ve seen what hasn’t worked and you now know there has to be a better way.
I found a better way!
Throughout the past 15 years, I have been managing millions of dollars for people just like you. I’ve spent years studying for the CFP® designation, years getting my masters degree in financial planning, and working for some of the largest firms on Wall Street. Then finally I had enough! I was tired of working for firms that claim to have the best interest of their clients at heart but their decisions clearly indicated otherwise.
The chain of command often does not work in your favor. If your firm is publicly traded, shareholders come before you. If you invest in mutual funds, your manager gets paid whether he makes you a dime or not. Mutual funds spend billions each year selling you product yet very few outpace their benchmark. If you invest at a bank or credit union it’s often about fee revenue more so than making you money. If you invest with an insurance company often it’s about making a commission and there is little incentive for servicing your account.
Now don’t jump to conclusions. I’m not here to bash every financial advisor, broker, planner, or a Wall Street firm, I am here to say I have found a better way. That’s exactly why I help start Values First Advisors, an independent firm dedicated to putting our client’ values and interests first. At Values First Advisors, we offer asset management and financial planning from a biblical perspective and work on a fee-only basis. We charge fees for our services based on the value of our time and the amount of money we are managing. It’s all about having someone working in your best interests, if we can help you in any way, please let us know.
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