- Financial advisors primarily lie to customers, and they are compensated and incentivized to do so.
- We cover the biggest lies peddled by financial advisors.
Look at me. I represent a big firm, and I have a nice expensive suit. You can definitely trust me with your money!
The Way the Game Works
Financial advisors have a song and dance that they like to engage in when the acquire a new client. First they try to dress conservatively and communicate an image of austere integrity. Furthermore the individual you meet attempts to present the idea that they personally pick investments. In fact, when you enter a retail financial services office (which are often in the nicer parts of town), you are in essence entering a completely staged environment which is as fake as movie set. There is no austerity, and certainly no integrity in the financial profession. Secondly, when you deal with a financial adviser at a retail outlet, you are dealing with the bottom rung of the firm, and these advisors essentially have no control over what investments they recommend.
- They are mainly selected for sales skill, not financial knowledge, because retail investment advisors do not do their own analysis in any case.
- They are told what to recommend by the real decision makers that work in Manhattan. As shocking as it may seem, in many cases, in addition to making significant fees off of your money, they also are horribly corrupt in that they may recommend investments that the investment bank either further profits from directly, or may be simply assets that sit on the investment banks books that they want to get rid of.
This is shocking to many people who trust the “names” of these companies and believe in the advertising. However each of these firms is engaged in consumer fraud, however, because the Securities and Exchange Commission does nothing to regulate this industry, they can get away with anything they like. You can not win in this situation and almost anything they do with your money, short of straight siphoning of accounts is completely legal. Furthermore, the political structures in this country cannot control or regulate the finance industry, as Illinois Dick Durbin once said “The banking industry owns this place.” (speaking of the Senate).
- Investment firms are huge incredibly powerful monopolies that do not operate in the normal economy.
Dancing With the Devil
As soon as the customer (or mark in industry parlance) sits down, they will be subjected to a long string of lies. Some of the major lies are in the assumptions that your the customer is expected to accept. Each of these assumptions are untrue, have a very tenuous link to finance, and are designed to maximize the movement of money from your account, and into the financial firm’s account.
Here they are (in no particular order). See the explanations for each below with the matching item number.
- “I have an MBA (or other degree) in finance and or “I have been working in this field for (insert years) and I am quite experiences.”
- “We need to develop an investment strategy based upon your risk tolerance. Would you say you are a high, medium or low risk investor?”
- “Here is a list of (funds-stocks-bonds-whatever) look how well these ones did last year and how well you would have done if you had been in them.”
- “We are an (insert number) person company, and you get access to the research that we perform.”
- “I can call you when I get hot tips, and this can help you rebalance your portfolio to promising opportunities.”
- You should stay in the market because if you get out now you will miss opportunities for the rebound. Studies show that stocks outperform other assets over the long term.
Here are the reasons why all of these assumptions are false.
- The education of your advisor or their experience level is not material to the recommendations you will get, because they do not make investment decisions, and are instead provided with a narrow series of options which are sent out to all the retail locations. The degree or other certificate is designed to impress you and nothing more. (see more details on this point and Glass-Steagall at the bottom of this article)
- This is one of the most important weapons in the bag of tricks of false assumptions of the investment advisor. The whole point of this is to make the investing process seem more difficult than it really is and supports the idea that every investment “strategy” needs to be tailored to clients. We explain further on why this is untrue.
- This is an old con, there is no evidence that the firm or advisor picked these investments that they are showing you. Any advisor that could consistently pick winning funds could leave the place they work and simply create their own investment company. They are working in a retail sales job because they can not do this…and the geniuses in Manhattan can not do it either. It is a simple thing to go and look to see what did well the year before, and then show people what they could have had. Furthermore, this strategy moves clients into asset bubbles, as sectors tend to increase and then decrease or at least decrease in the appreciation percentage the next year.
- This is completely untrue as different levels of investors are prioritized in terms of who get what information. Accounts below $500,000 are considered more or less expendable, and often get the worst investments, sometimes that the bank does not want to continue to hold. That is the problem, the investment bank is both providing investment advice and itself speculating on investments, creating huge conflicts of interest all around. The higher your asset level the more important you will be seen and the more likely you will get better advice. However, you have to have a lot of money to be seen as important enough not to burn. There is compelling research on this…none of it published by universities or investment banks. It is called the yield disparity.
- This is typically a request to churn your account. Because transaction fees are where the money is often made, your advisor has an incentive to keep bringing you “hot tips.”
- This is the standard line used after an investor’s portfolio has declined. Rich investors do not “take their losses.” They use inside information to avoid them or let the investment firm know they will be taking their business elsewhere if it does not stop. Have you ever tried negotiating with rich people? I will put it to you this way, all of Beverly Hills uses illegal Mexican gardening services even though the owners are multi millionaires. Secondly, the statement regarding the stock market outperforming other investments is totally false but frequently repeated, because it does not stipulate what type of investor is being discussed. Wealthy investors that gain off of inside trading information or are considered valued accounts by investment companies do do better in the stock market, but this is not representative of all investors. Therefore, the statement is only true for certain classes of investors. Thus the “average” which is often sited does not exist.
More Complex Than it Needs to Be
There is a lot of smoke and mirrors in the finance industry which covers up the fact that not much is going on, and that which is going on is mostly counterproductive. Finance has a series of complex terminology but it is all boils down to a bunch circular techno-babble, developed by money obsessed quantitative types (aka “quants”), managed by slick sociopaths, and pitched by borderline con-men. The vast majority of the finance industry is simply a parasite on the real economy. If it disappeared tomorrow, it would ignite a renaissance in the real economy.
The intent of the finance industry is to make finance so complex and create so many “products” that the typical person needs a “financial advisor” to help them manage their money.
Massive Inefficiency of the Stock Market
How inefficient is this system? Lets take the stock market. Many are surprised to learn that only about 1% of money raised by the stock market actually goes to the companies that are raising money (according to the CEPR). The rest of it goes to investment banks, transaction fees and so on (this statistic is for the life of the stock). While it is a terrible deal for companies, companies continue to issue stock and the stock market persists as a way to compensate executives off the books (options are not declared on the income statement or balance sheet).
Stocks: A Fake Alternative
So, stocks are a toxic investment for the vast majority of investors and should not be dabbled in. So that takes out one asset class. Bonds and savings accounts provide very similar returns. Go ahead and select from the low yielding alternatives, however at least you can be pretty much guaranteed not to lose money. Much of the finance industry is enabled by investor greed and a misunderstanding of how capital markets in the US work. Average ordinary people who believe that they can get and deserve strong returns on what is a passive investment are gravely mistaken. Our system distributes high returns to those with significant assets. However, the belief that great returns are available to ordinary people is what lays open the trap that the financial advisors can then enter to sell fool’s gold.
The dirty little secret is that you really should not be making a very strong return from what is a passive investment. Good returns are reserved for the wealthy. Everyone else, unless extremely lucky, gets mediocre returns. The main objective is not to lose the money you currently have and to receive a reasonable return. To get that, you don’t need an investment advisor. However, without the small and medium sized investors, the wall street casino ends, so this is hidden from the normal investor.
Con men have an old saying “you can’t cheat an honest man,” this is because all cons are based on tapping into the greed of the mark, the idea that they will get something for nothing. More honest people outside of the finance industry would make the banking industry considerably smaller.
This is an excellent book, reading it will tell you more about the financial advisory business than any book on finance. The same tactics used in this book are used by all the major investment companies.
Under Clinton and the Senate and House, investment advising became even more corrupt because the dividing wall was further eroded by the Glass-Steagall Act. Chuck Collins has a great description of this in his article The Visible Hand – Seven Government Actions that Have Worsened Inequality.
By removing the barriers between banks and securities firms ushered in a new wave of speculative mega-mergers. Firms such as Citigroup, f.P. Morgan Chase and others took advantage of the new rules by forming ].P. Morgan Chase and others took advantage of the new rules by forming mega-conglomerates that financed Enron and other disasters. Repealing Glass-Steagall also exposed small investors to new risks. Glass Steagall had required banks to maintain a firewall between investment bankers (who facilitate deals between banks and corporations) and brokers (who buy and sell securities for investors). Eliminating this firewall gave brokers incentives to lie to investors about the quality of securities in order to promote deals that the bankers were pushing. In one case uncovered by New York State Attorney General Eliot Spitzer, Citigroup CEO Sandy Weill was on AT<&Ts board of directors when he sent an e-mail to Citigroup analyst Jack Grubman asking him to upgrade AT&Ts investment rating as a personal favor. Grubman upped the company’s rating just before Citigroup secured a deal to manage the ATT wireless division’s initial public offering. Soon after the IPO, Grubman downgraded AT&Ts stock, and the price plummeted. Citigroup reaped over $40 million in fees from managing the IPO, while investors were duped out of millions more. – Chuck Collins