I speak to people who may come to our firm as a result of a bad experience some place else. Without fail, it is because they lost money at either a bank or a Wall Street firm. Typically, the story goes like this:
"I had some money with a big brand name bank guy who put me in a portfolio of mutual funds. When I started with him, I had over $800,000. When 2008 hit, all he kept telling me was to "Hold on. It will come back." (Where have I read that before? Oh yea. My book.) Of course, I lost all the way done to under $400,000. So, I moved my account away from my big brand name bank guy and went to a Wall Street firm guy. (Where have I heard that before? Oh yea. My book.) The Wall Street firm guy was no better. He knew I did not like mutual funds, so he put me in stocks. The problem was that he never watched them. He made some bad stock picks. There were no stop loss orders, puts or anything to protect my money. Over a year later, I am still around $400,000. So, this brings me to your firm to find out what you can do for me. Here are my demands if you will. I need to make a lot of money to make back what I lost. (Where have I heard that before? Oh yea. My book.) I want to be aggressive, but I want to also protect my money from losing anything. I need about $1,200,000 to retire and I want to do it in a few years. What can you do for me?"
Of course, I am thinking to myself...didn't this guy read my book? Apparently not. If he did he would know that you never do your investment business with a bank or Wall Street firm. The price for this fictional character was $400,000. If I were to walk up to you and say "give me $800,000 and let me turn it into $400,000 for you," then you would think that I was crazy. However, this is exactly what you are risking when you go to a bank or Wall Street firm. This is not atypical, but rather is very typical of what happens to people who get their investment advice from a bank or Wall Street firm.
When you, as a client, walk into a bank or Wall Street firm with $800,000, then they are going to do everything they can to maximize their commission revenue from that amount. They have no incentive to keep that $800,000 up or to grow it. Why? Because they already made the most that they could make when you walked in the door with the $800,000.
Then, after you take your account to the Wall Street firm, you give them to opportunity to maximize their commission revenue on the $400,000 or so you have left. The Wall Street guy is kicking himself wishing that he met you when you had $800,000, because he would have been able to double what he made on the $400,000.
Get this point if you get nothing else the rest of your life.
The banks and Wall Street firms do not care about the success or failure of your account. They have no incentive to care. All they care about is maximizing the most commission revenue that they can from you. Period. Point blank. End of story.
A registered investment adviser on the other hand has its compensation aligned with the success or failure of your accounts. If your $800,000 goes down, then their compensation also goes down. If it goes up, then their pay also goes up. Now, let me ask you a question. If your compensation had the opportunity to increase the more successful you were at making investment decisions for your clients, then wouldn't you put a lot of effort into what you do? This is my point exactly.
Conversely, if your compensation as a registered investment adviser went down if your client's accounts went down, then wouldn't you do everything you can to make sure that their investment portfolio was focused in the right areas given the current market environment? Further, wouldn't you treat that account as if it were your own? Is this sinking in yet?
Registered investment advisers who are paid on the success or failure of a client's investment account are more apt to be on top of things as opposed to a bank or Wall Street firm who has already gouged you for all they can get on the front end.
Here is an example of something that I did to prove my point that registered investment advisers will make a move to protect client assets. If I had a client with $800,000 and I let their account go down to $400,000 then, I would have let my compensation be cut in half. This is not smart. It is stupid.
I moved my clients to cash on October 6, 2008 and back into the market, May 8, 2009. Go look at a chart of the S&P 500 during that time period. Find October 6, 2008 on the chart and imagine you were 100% cash. Then, find May 8, 2009 on the chart and imagine you got back into the market at that point. Then, tell me if this was good or not.
Here is another problem with my fictional but based on real life example. This fictional guy went to a bank. He lost money, then went to a Wall Street firm where he didn't do anything but tread water. Between the two, it cost him $400,000 and a several years of getting towards his retirement goal. I say several years because his retirement goal is $1,200,000. In order to turn $400,000 into $1,200,000, you need a 300% return. Yikes! (Where have I read this before? Oh yea. My book.) As my luck would have it, my fictional client expects me to turn his $400,000 into $1,200,000. Would you agree that the fictional client's expectations are a little out of whack? Believe or not, people like this, do not think they are being unreasonable at all. Obviously, they now have a very low opinion of financial advisors in general, so now I am guilty until proven innocent. Now you know why I hate banks and Wall Street firms.
Here is your first clue about the people giving investment advice at banks and Wall Street firms. They are not "financial advisors." They just use the title to convince people to do business with them. Why do you think the SEC is looking at requiring all financial advisors (people at banks and Wall Street firms) to do what is in a client's best interest and to be held to a fiduciary standard of care?
Registered investment advisers are already held to a fiduciary standard of care and look out for the best interests of their clients.
The root of the problem is these "financial advisors" at the banks and Wall Street firms. They are raking people over the coals everyday. People fall for their glitzy ad campaigns thinking that banks and Wall Street firms care about them. But, the truth is they do not care at all about anything but maximizing their revenue.
Unfortunately, there is no way to be aggressive and not lose money. This strategy does not exist, even in a hedge fund environment. Investing equals risk. Investing aggressively equals more risk and the chance of more losses. So, what is a registered investment adviser to do with a client like this?
Teach them the finer points of life. Specifically, ten points to live by. An investor creed if you will.
Rick Johnson's 10 Point Investor Creed (Better know as the good, the bad and the ugly.)
- Doing business with a bank is bad.
- Doing business with a Wall Street firm is bad.
- Doing business with someone whose first priority is to maximize their commission revenue is bad.
- Expecting a 300% return in a few short years is bad.
- Investing aggressively and protecting your money from losses is ugly.
- Doing business with a registered investment adviser is good.
- Doing business with someone who has your best interests at heart is good.
- Doing business with a Certified Financial Planner® who also works at a registered investment adviser firm and is not affiliated with a bank or Wall Street firm is good.
- Having a well thought out plan for your future designed by a professional whose compensation is tied to your success or failure is good.
- Never allowing yourself to fall victim to a "financial advisor" at a bank or Wall Street firm again is good.
I trust you can now see the light.