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When you go to the doctor you always imagine that they have your best interests in mind when you see them. The Same rule applies when you walk into a bank or financial services office. Unfortunately not always the case. With the doctor, typically their motivation is to help you get better. With the financial services industry, the motivation can be to line their own pockets. Not yours.

 

• Money and commissions are a driving factor in the financial services industry

• Finding people with values and ethics is key to establishing a great partnership

• Advisors that “eat their own cooking” should be a prerequisite

• Fees and residuals are the bread and butter of the financial services industry

 

Today’s session will be a detour from our normal programming. In today’s session, Andrew and I will riff a little about some of the things we see going on in the financial services industry. Too many people are caught unawares by the shady dealings that can go on in the finance world. We know that this may be a controversial topic, especially considering that we are in that industry now. But our goal is to educate and to set the bar higher, not fleece just for the sake of making a quick buck.

Andrew and I will talk about some of these goings on and attempt to bring to light some of these practices to help enlighten our listeners.

On to session six.

Andrew: I will start off by saying this is probably a bad move. You know, we will probably get a couple of targets on our backs. And it might even make the listeners less likely to listen to us or might make them not likes us.

Whatever it is, the way I kind of look at it is if I was in the listener’s shoes. If I was talking to someone in my family, or somebody I cared about. These are the types of things based on my limited experience and what I’ve learned so far. These are the types of things that I would want to know and that I think anybody who is just starting out should at least be aware of.

Not to be disappointed or feel the cards are stacked against you. But really just to be aware and understand. And from there can give you a better filter. If you can figure out what drives people to do what they do. Understand where people’s interests are. Where the financial incentives are. If you can really understand that it goes a long way towards getting a better grasp on why things tend to work the way they do.

Dave: Yeah, I would agree with that. As far as the target on our back, or upsetting or offending people. Truth always sets you free. And we really need to talk about what goes in the industry.

You can see people out there that are in it for themselves as opposed to acting as a fiduciary. Really being responsible for the people they are representing and giving advice to.

A more take on the recent rollback of the rules and laws governing fiduciary that affects a lot of people.

There are a lot of people in the financial services industry that are out there to make a buck. They don’t a crap about who they hurt or how much they mislead people. Don’t tell them the whole story or don’t give them all the information.

And I think it is our job and duty as someone who cares about how somebody invests for their futures, save for their retirement. Saves for their children’s retirement. Help them be more responsible and be better financially for themselves. It is our responsibility and duty to bring those things to light. The only way to get these things to stop is to make more people aware of them. So that people will take action on things that upset them.

Andrew: The key to that being aware. And I think it’s important to be aware of where these words are coming from. This is myself and you, Dave.

We are now part of the financial services industry in a way, because of this podcast and our writings on our blogs.

It is important to not only understand the whole pictures and how it works. But also where our stance on it is. If you can get a sense of that or step into our shoes. You will understand better how you can apply it to your own situation.

For me, I’ll admit I am not the best person when it comes to living life, I guess. I have my downfalls and mistakes just like anyone else. I don’t want to say that I am better than a big group of people. Or even an entire industry.

However, the way that I have set up my business is that it aligns with my own values. So, what that means for me is that I really value freedom. Freedom of time, freedom of expectation. Freedom of stress. That is a big reason why I do everything that I do.

I really structure everything from a business perspective trying to attain that freedom. And what that means for me personally is. I don’t take other peoples money. I give advice and recommendations based on my experience and what I am very knowledgeable on.

But I don’t take other people’s money because I know that I cannot control how other people think. And so, the idea of creating a mutual fund or pooling together a bunch of money doesn’t appeal to me because it comes with that responsibility. And comes with the possibility that other people are not aware of how Wall Street works. And will pull out their money and really hurt the ability to make money.

So, I put that responsibility of making returns on myself. And thru the podcast and blog make that option available for everybody.

My whole point in saying that is in the way that I choose to structure my business in this way. Where I want to find the most freedom for myself and for the most freedom for the people I help.

It kind of naturally aligns the interests of anybody who chooses to follow me. If the whole entire goal for me is to make a system that will minimize how much time I will have to put into it. How much responsibility that I have to feel. And frankly, how much results I can get for people.

Because this only works if the advice helps people. I am not some super-human out to save the world type of person.

The truth is if I want to pursue this type of approach then I have to make advice that is not only credible but helps people.

I guess that is the whole point of what I am trying to say.

We should talk about when interests don’t align, particularly on Wall Street. It can really problematic for investors. Especially if they are aware of that dichotomy.

Dave: Again I would agree with that. My thoughts on that are the same. You know the whole reason I started doing this was because in my day job, in a bank. I see on a daily basis people that are struggling, people that are learning the hard way.

And I am not saying that we are going to help people not learn the hard way. Sometimes the hard way is the best way to learn. There are so many fundamental things that are missed.

Money is just not taught in the schools. And I am not really sure why. Most of us, including myself have had to learn as we go.  And I think people prey on that. They see people walk in that aren’t educated. Are not financially savvy. They don’t know the questions to ask and they don’t know a good strategy for them.

That’s really what it comes down to. Every individual has their own makeup and their own way of doing things. Our job, as I see it is to work with each individual and see which things that are going to work for them.

Give them a presentation of things that could help them. And if that doesn’t help them then we move on to something else.  And try to tailor things to fit and make them work for them.

Kind of the way that I have structured what I am doing is I am trying to be an educator. And be out there to try to help people. And help people learn so that they can make the choices. So they can find their own freedom, whatever that might be. Not try to stick everyone into a pidgeon hole.

Kind of segueing off of that the way that Wall Street is set up the profit is made off what they sell as opposed to the returns that people actually get.

Lately, there has been a lot of talk about passive versus active management of funds. And someone who works in the industry I can see it on a day-to-day basis. I see people who money to invest and they are given advice on what to invest in based on how much money it will make the advisor. Not the client.

The client wouldn’t know if the advisor told them to buy Berkshire Hathaway, Tesla, Apple or Enron. They wouldn’t have any idea. They may have heard of these companies. But they wouldn’t know which one to invest in or not. They wouldn’t know that it would make the advisor 6% a year and the client only 3% a year.

That is where this fiduciary law would be beneficial for people. It would require the advisors to actually tell the clients this information, as opposed to saying this is what you should do without any explanation.

Think of going to a doctor.The doctor tells you should do this, you say to yourself. Ok, the doctor says I should do it so I don’t question it and do it.

It kind of works the same way in the financial services industry. You walk into a bank or financial advisors office, they are not necessarily looking out for your best interests.

There are good people out there. And I have been lucky enough to work with quite a few. But I have seen some very shady things and some really dishonest people. They are just looking to make a buck and sell things that will make them the most money.

 

Andrew: A perfect example of that is the brokerage, right? So, a brokerage firm is paid not on how much you make as an individual investor. But based on how many trades they execute. They are going to get paid based on the trades. This works not only on the individual level but on the institutional level. And you can even talk about when there are underwritings for IPOs, like the recent example of Snapchat. Or secondary offerings, those can be much greater commissions.

I don’t want to single out any company out. But it you look any brokerage website and you become a client of theirs. Chances are you going to see what they call, resources. But you will notice that it is really targeted towards things that will make them money. They will really try to push options on you. They will try to push strategies that are going to have you going in and out.

Dave: Lots of day-trading, hedging.

Andrew: Things that get you sucked in with leverage and all sorts of options trades. They masquerade it as some sort of resource to help you. But really they are structuring their website to show you the right way to become an educated investor. When it’s not. It’s the right way to line their own pockets.

And I think with a fiduciary disclosure or not. Who is going to read a little disclaimer at the bottom of some document?

Dave: True, very true.

Andrew: These are just some of the things that you have to be aware of. Understanding what the financial incentive of the company is and why they are going to structure their business that way.

Another example of that would be mutual funds. Mutual funds are a huge one, obviously. They’ll tend to take your fee upfront and they’ll call it a management fee. And really what it is is an excuse for them to market as many different funds as they can. They are trying to get as many customers to invest money into the mutual fund as they can.

That is the number one goal. Assets under management.

If people understand that and buy stocks in boring industries. And actually, do really well.

But if they’ve learned thru their marketing studies and empirical data that they don’t have to perform so well. And have to buy the right stocks that everybody is talking about. And that is going to attract more clients.

Then this becomes another sort of conflict of interest where you are putting your money in a company that is not necessarily aligning their interests with you and simply be trying to bring in as much capital as they can.

They charge these management fees because it gives them an excuse as they move things around. And then they will bring in managers who are financially incentivized to get really short-term results.

So on one side, they are really trying to get the popular vote and buy these stocks that are really exciting. That way when they show prospective investors their portfolio. They can say we have these stocks in our portfolio.

And the fund manager wants to get as much short-term gain as he can in as short amount of time so they can put that same info in the prospectus. Well, look at our one-year return, it’s 30%. They are going to formulate that prospectus and they are going to cherry-pick a time period to make their returns look as great as they can.

Chances are if you look at a long enough time period and those returns will probably not be as great as they are propping them up to look like.

You want to see real results look over decades of time. Look at Warren Buffett, Seth Klarman, Peter Lynch. All of these guys have compounded really great returns over decades. Not over some cherry-picked one year, three year time periods. Or even some special five-year period.

Dave: Right, exactly. Along those lines, one of the things that I see are people that are frustrated or matched what is going on with the market. The fund manager will say, well if we move it from this fund to the other better performing fund. If you look at the one-year return of this fund, it is making better returns than the old one.

So why don’t we switch from the old fund to the new fund, but they don’t mention the fees involved in moving the money like that. That way we can get a better return, but they aren’t told about the fees involved.

Selling out of the old mutual fund and investing in a new mutual fund is going to involve trading fees as well as load fees and management fees. This all equals more money to be made for the fund manager or advisor.

As opposed to sitting down with the client and discussing what their plan is or what their goals are. Asking them how they want to approach things or having a plan. As opposed to adapting to whatever is happening in the market.

In a lot of financial documents, there is a phrase that will say something like “past results do not guarantee future returns.” This should be taken to heart when we look at some of the things we have been talking about.

When you talk about the Warren Buffett and Charlie Munger of the world. They have been doing this for fifty years and kicking butt for fifty years.

When you look at some of the mutual funds, to pick on them for a moment. They haven’t done as well which is why there has been such a huge exodus from actively managed funds to more of a passive indexing fund. Because the returns haven’t been adequate. And they have been making money off of people for decades and they haven’t earned the results they should have.

At some point, it becomes a beast unto its own. It becomes much harder to turn and make decisions but they are perfectly content to sit there and take your money without telling their clients and customers that maybe this isn’t the best strategy.

Another thing about the financial advisor and selling investment advice and the money that comes from that. A lot of financial advisors main goal is to get assets under management. To get people investing money with them.

They don’t necessarily care what kind of returns you are going to get. Because the more money they have sitting in their accounts the more money they make. The call this residual. Most financial advisors make anywhere from 1% to 3% of residuals. So if you have one million dollars they are going to make 1% to 3% of that asset. All this for doing nothing. Nothing. That is just part of their pay.

Their goal is to try to generate more people investing with them. So they can make more money, not the kinds of returns they can create for their clients.

One of the biggest questions you should ask a financial advisor when you sit down with them is “how do you get paid?” Do you get paid on your results or just because I gave you $125,000 to invest for me? That is a really important question when you sit down with somebody.

“How do you make money?” If they can’t tell or hide behind some slick brochure, then say “thank you very much” and go find another advisor who will tell you that answer.

Andrew: Ask me that question.

Dave: Andrew, how do you get paid?

Andrew: In some ways, I am a marketer too. The more people I help the more money I will make. Like I said before it goes back to staying with my values.

I have my own investing strategy and I share it with my eletter subscribers. My life savings is all going towards those picks. I also have a second product, the Value Trap Indicator book where I share exactly how I came up with that strategy.

So for me, it really comes down to if I am succeeding, then other people are succeeding. And I think that is the best way to align interests and to make sure somebody is on your side.

Dave: I would agree with that. And the other question I guess I would ask is how do you invest? Are you eating your own cooking? And I know based on the things you and I have talked about that you are.

You just said it, that you are investing your life savings into your strategy. There is a lot to be said for that.

If the person you are looking to for guidance and advice is not following their own advice, then that to me would be a huge red flag. If they don’t believe enough in what they are trying to do or sell to you. That would be something that would turn me off and make me want to run in the other direction.

I will give you an example from the restaurant business. If you ever go into a restaurant and see the employees eating the food. That is a good sign of a place that serves good food. If the employees like it enough to eat there on their breaks that is a good sign it is good food.

I think if you are sitting across from somebody and are looking to take their advice or reading a blog and they are not taking their own advice. That would be concerning to me.

One of the things that I like about Andrew and that I took to immediately is that he comes across as very trustworthy and he’s eating his own cooking.

That says a lot about his values and his belief in the system that he has created to try to help people.

Andrew: And if you are talking to that advisor and they feel that the question is too personal. You can tell pretty quickly if the person really knows their stuff or if they are just blowing smoke.