The Big Lie Your Financial Advisor Will Never Tell You About
September 19, 2018
What Wall Street Won’t Tell You
Working on Wall Street is a bit like having a spider crawl up your leg; the experience won’t kill you, but it sure feels icky.
I started my financial career working in a brokerage office. If you had been a fly on the wall, you would have regularly seen a hundred or so advisers clamoring on the phones, pitching to clients. When the market opened at 9:30 a.m., the energy level in there felt like Yankee Stadium during a playoff game.
As an intern, my job was to assist one of the office’s senior vice presidents.
If you had a powerful person in your corner, that could make a big difference when looking for a full-time gig. So that summer, I wanted to do whatever it took to impress him.
I’d get into the office at six in the morning. That didn’t work.
I tried staying until seven or eight o’clock at night. That didn’t work.
I read every research report in the building, just to get the inside track. That didn’t work.
Finally, the managing director took notice. He was sort of a tall, lanky gentleman, looking a little bit like the boss from the movie Office Space. Amused by my lack of success around the office, he took me out for lunch to give me the score.
“Rob,” he started. “No one here gives two hoots about investment research. I’ve never read an annual report in my life. The game here is to sell. If you want to impress the senior vice president, start bringing in some dollars.”
Right about now you might be yelling into your computer monitor, “Of course, Rob! Wall Street is packed full of slimy hucksters with egos too big to fit through the door.”
Hey, I know that now. In my defense, that internship was my first real job, aside from flipping burgers at a diner. Still, it felt jarring to hear an industry insider put it so bluntly. More worrying, though, is how few people realize that Wall Street is rigged against them.
The problem comes down to how the industry is structured.
When most people walk into a bank or brokerage office for advice, they’re greeted by a “financial advisor” or an “account representative.” Based on those titles, many people would assume they’re dealing with a trusted partner who puts their clients’ interests first.
In reality, however, most client-facing financial professionals amount to glorified salespeople. Their job isn’t to advise their clients; it’s to distribute investment products.
When they are marketing their services to the public, financial industry workers like to present themselves as “trusted advisors” working for their clients’ best interests. But try to hold them accountable to that standard in a courtroom, and those same professionals start singing a different song. They say that because they “merely sell” investment products, certain regulations should not be made mandatory.
It’s not hard to imagine how financial kickbacks can create a conflict of interest between clients and salespeople.
Say an advisor can meet a client’s need with product A or product B. Both products are identical in every way, but product A offers a much better commission.
The advisor now faces a dilemma: which product should he recommend? The decision is easy from the advisor’s end, but rarely so from the investor’s perspective. That’s because high-commission products are almost always the worst products to sell clients, namely due to limited access to funds and higher fees eating into returns.
For investors, making the mistake of trusting the wrong advisor can be costly.
High fees and conflicts of interest cost Americans an estimated $17.0 billion a year, according to an estimate by the Council of Economic Advisers. On a per-household basis, that comes out to about $140.00 in extra costs annually.
Those extra costs can really add up over time. The council estimates that excessive fees can erode 17% of your savings leading up to retirement, and then take another 12% bite in retirement. (Source: “New investment rule could save investors billions,” CNBC, April 6, 2016.)
That’s money, it’s worth pointing out, that retirees struggling to make ends meet can ill afford to lose.
This situation is precisely why I helped launch Income Investors a few years ago.
I didn’t want to spend the rest of my career trying to lure in clients, only to pressure them into buying overpriced financial products. I wanted a platform to provide truly independent, objective, and reliable financial commentary while advocating for a common-sense investment philosophy.
Unlike financial advisors, I have nothing to sell you except my advice. So it better be good. If it isn’t, people don’t renew and I go out of business.
I make nothing (not one red cent) from the few investments I feel are safe, strong, and successful enough to recommend. That, I feel anyway, is a better arrangement both for the readers and for me.
