The Problem with the Industry: Unqualified Advisors and Poor Investment Choices
I'm a tax attorney, so I see a lot of other people's finances.
The ones I see that work with a financial advisor are, without exception, paying at least 1% of AUM in fees to be in higher-costs funds that underperform the index funds in the long run. To make matters worse, the financial advisors choose tax-inefficient funds and take their fees in the most tax-inefficient way possible. I have also found that many do not understand the nuances of self employed retirement plans or the backdoor Roth.
In my view, there are a few problems with the industry. First, most financial firms hire salespeople and then teach them finance, instead of hiring people who already know finance. I know a LOT of morons working in Edward Jones shops and the like, who are charming but ultimately don't understand the back end of the products they sell. My ex worked for two of the large regional banks in my area, and she had a degree in communications.
She knew (and knows) nothing about finance, but instead was hired because her family is wealthy and gets referral business from old neighbors and classmates. She couldn't even pass the Series 7, but the banks thought she could work in trust management. I talk to clients and financial advisors all the time who don't understand the difference in tax efficiency between mutual funds and ETFs, or the mechanics and reasons of a 1031 exchange, or what the tax incentives actually look like in various types of accounts, or the merits of a solo 401k vs a SEP IRA.
When you only have a hammer, everything starts to look like a nail. Second, the incentives are rarely aligned in the middle of the market or below. Helping a 24 year old set up and fund their Roth IRA is probably not worth your time on the front end unless you're getting an outsized commissions, which ultimately cost the client more money than needed for someone with a small account.
Related Horror Stories
Pressure Tactics and Poor Advice
I had one guy INSIST that I buy a costly Variable Life insurance policy. “Don’t read the prospectus! TRUST ME!” Sorry. “We’re not leaving until you sign!” Okay well you may want to order a pizza, because it’s gonna be a looooooooooong wait!
Another time I met with reps from a major financial firm who asked how my investments had been doing. “For the past ten years my compound returns have been 27%.” (That is, my portfolio was up 10x over ten years.)
This upset then tremendously, like I had just told them I kidnapped babies to use as firewood. “Well, THAT’s totally unsuitable!”Well, what do YOU recommend? “We have a program that will deliver 7% a year. But no promises!” (Perhaps double over ten years.) Okay! We’re done here!
Nokia will rule the cell phone market
My 1 experience with a financial advisor 18 years ago. I did my high school senior project on investing. So my “mentor” was this financial advisor. I had 5k from my grandmothers to invest in (my great grandmother has mutual funds for all the grandkids so I cashed mine out and my grandma also threw in $1,000 for me)
Anyway.
His can’t miss these are about to be the next big thing picks were Nokia and Pioneer energy services. So Nokia only ever went downhill, I bought I think around $16 and sold at $5 some years later. Pioneer it actually had tripled at one point to $18 then a year later it was $2 then they went bankrupt so bye bye to that money.
I was really into computers back then, I had built my own and talked to him about how everyone in gaming was using Nvidia GeForce graphics cards. He has no interest in it. I can still hear his whiny voice saying how computer industry moves so fast and there will always be some new better faster thing on the market so that would be bad to invest in. And how Nokia was going to rule the cell phone market for years and years.
Most advisors are just monkeys
Most are just monkeys 🐒 on a string following a long set of guidelines. What you need is someone who understands math and questions every single guideline. Some of the guidelines don't past the test and end up costing their clients money every year.
This is a very small percentage that can actually do this. In fact my financial advisor is one of the majority monkeys. Occasionally I need to remind him to manage my account my way or he will start managing it like the rest of his clients. But he is a very good and smart person with a good heart.
I wouldn't trust a good percentage of them, find one that gives of the right vibe.
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