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:
- Your advisor’s interests
- His or her firm’s interests
- 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.
So what should you do?
How about getting an independent, unbiased review of your portfolio situation? We can take a look and analyze both the moral and financial implications of where you’re investing. How should you be investing the money God has entrusted to you?
I will be more than happy to take a personal look at your accounts and give you my best advice.