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Your 401k Is Riskier Than you Think Preface The more you learn about conflicts of interest (determining how money is made) in the financial services industry, the more you realize the harm these conflicts of interest can do to your portfolio. Conflicts of interest are the rule rather than the exception. And they can easily cost your portfolio over 1% per year. Studies in the United Kingdom, Australia and the United States show us that conflicts of interest are rampant but investors are not aware of them. They also show us that if investors were aware of them they would try to avoid them. We created this guide to help you identify these conflicts of interest and avoid them. If you are reading this guide you are successful or hope to be successful. Which means you don’t want to rely on government to have a comfortable retirement. And you don’t want to be a burden on your spouse or children. As a successful person, you may have gotten rid of your mortgage based on Dave Ramsey’s advice. Mr. Ramsey may have helped you jump start your savings and investing plan. But the more and more your money becomes “serious,” the more you realize Mr. Ramsey’s overly simplistic investment guidance isn’t enough. Because Mr. Ramsey’s investment advice is very risky and too generalized. It’s great for starting a saving plan but because it is given with a clear conflict of interest and because it is risky, it is not appropriate for preserving money. At least not serious money. Money is “serious” when it is money you can’t lose and not make back. You are probably reading this because your money is serious now. Just pretend you could invest conflict free. What would that be like? Because your money is serious, it is more important than ever that you navigate the landmines in the conflict of interest-ridden financial services industry. Numerous studies confirming that conflicted advice costs investors over 1% a year cause our government to act. The US Department of Labor has essentially ruled that it will be illegal to give conflicted advice to IRA and 401k holders in 2017. If this rule is fully implemented it will cost banks, brokerage firms, and insurance companies hundreds of billions of dollars in profits. Which means banks, brokerage firms, and insurance companies will spend more money than ever to protect the right to sell conflicted advice products. It also means these firms (and especially insurance companies) will be more aggressive than ever before the ruling takes place. Which means you are likely to see more insurance pitches than ever. Just for fun turn on conservative talk radio and try to find the index annuity pitch. Hint you will hear words like “safe,” “common-sense,” “green money,” “Worry-free.” Summary The equity funds in your 401k are very risky. They are risky because they are not really run by portfolio managers. Instead they are run by clerks, managed by bureaucrats. Few of these “portfolio manager” clerks have their own money invested alongside yours. With no skin in the game, they follow ridiculous rules that no thinking person (who has to run a budget) would follow. After you learn how (most of) these funds work, you might take a different direction with your “serious” money. Private contracts (that you can’t see and don’t know about) determine which products and services your financial advisor gives you. And these are probably not the ones you would choose if you had all the information (you don’t). Because most financial advisors work for publicly traded companies, they have a legal duty to put company shareholders (people that own shares in company stock) before everyone else, including clients. Which means all publicly traded banks, brokerage firms, and insurance companies face a key conflict of interest that simply cannot be resolved. Bankers engage in bad behavior because their managers make them. They make them “cross-sell” products and services to maximize revenue and profits for shareholders. That’s why they are always offering you something else and will even force you to move your investments to them after they lend to you. And you are captive to them because you need them for savings and checking (or at least they have convinced you that you do). Which means you often don’t have any choice but to hear their pitches. So you need to know how to respond. Life insurance is often the most profitable product that a ‘financial advisor” can sell you. Insurance agents (posing as financial advisors) sell highly profitable annuity and insurance products because it is profitable, not because it is a good “investment.” Ask someone who can’t sell insurance and get a commission whether the insurance is needed before purchasing. Never ask an insurance agent (who can get a huge commission). Since most “financial advisors” have life insurance licenses you need to be very careful. The larger the fund the riskier it gets. The more successful a fund is in early years (unless the portfolio manager closes it) the more assets it attracts. Which means the manager starts investing more like a risky index (because it is so large and because the manager is forced to do so). This problem can only be overcome by investing with managers who also have skin in the game and are independent of the large publicly traded firms. Remember the best decision you ever made? It may have been when you got married. Now remember the worst decision. If you are a human being (like our clients) you probably have a tendency to suppress the worse memories. That’s how we live. But it doesn’t mean you don’t have them. We all make mistakes. It is because we are rarely rational. We nearly always rationalize. Which means we find words and even reasons to justify our actions only after we have taken them. We almost always rationalize, after the fact. Which means our decisions were not made from a careful analysis of rational choices but instead based on feeling. This is a biological reason for this. And there is science proving this. Investors leave a lot of money on the table because they buy high and sell low. We know this because it has been proven in many studies, and because we have observed it. The sooner you realize you are incapable of making the right decisions without preparation, the better the results you will experience. And you will find yourself worrying less about retirement income and leaving more of an inheritance to heirs or charities. #1 Your 401k is full of Risky Investments (run by clerks, not portfolio managers with skin in the game) Suppose you wanted to retire (because you hated your job) but waited a year and saw your portfolio fall? This story puts this this problem in perspective. Joe was forced to retire a decade later than planned because his portfolio took a tumble. And it took 12 years to recover. Why did Joe take so much risk? Because he took the advice of an “expert.” Joe was a fan of Dave Ramsey. Dave Ramsey helped Joe get rid of his mortgage and start aggressively saving in his company 401k. That was great advice. Dave Ramsey also told Joe he could make 12% per year by investing in “good growth stock mutual funds.” Joe following this advice, and picked a mix of funds that had high ratings. But he didn’t have any idea how his funds were managed and how the ratings were assigned. Dave Ramsey doesn’t talk about this because it’s complicated to explain. In general he advises his followers to invest in funds that have “consistently performed well.” After good market runs, this includes all of the largest equity fund families like American Funds, Dodge and Cox and Vanguard. Dave Ramsey doesn’t explain why funds are risky (probably because he doesn’t understand it). He’s also paid not to understand it. He refers his followers to a network of Endorsed Local Advisors who sell funds offered by the largest equity families. But I am not here to bash Mr. Ramsey, who does a lot of good for a lot of people helping them get rid of debt (we like that!). I am here to clarify why this is bad investment advice. The overwhelming majority of “good growth stock mutual funds” offered in employee 401k plans are so risky is that the fund “managers” buy more stocks when they get more expensive and sell them when they get cheaper. This is because they are benchmarked to “market capitalization” weighted indexes. They have to –it’s standard practice. The publicly traded companies they work for make them do that in order to get high ratings. There is less “career risk” benchmarking and the “managers” are less likely to get fired. I can imagine how you may be confused by the term “market capitalization weighed”, so rather than define it let’s use a Dave Ramsey concept to explain it. We love Dave Ramsey on budgets. Most folks live on a budget. Which means they can only spend a set dollar amount, for instance on food. Now imagine you only ate rice and beans. Let’s assume rice and beans both cost the same amount, say $1 a pound. If you budget $100, you would spend $50 on rice and $50 on beans and you would have 100 pounds of food. Suppose the price of beans rises 50% to $1.50 and the price of rice falls to $.75. In order to buy the same amount of beans you would have to spend $75 ($1.5 x 50). Which means you would only have $25 left to buy rice. Because the price of rice fell to $.75 you can buy 33 pounds. But you are still left with only 83 total pounds of food. Which means someone is going hungry (that’s 17 lbs. less of food!). Now suppose you don’t care whether you eat rice or beans, you just want to have 100 pounds of food. In this case you could buy 100 pounds of rice for $75 and have $25 left over. But if you like diversity and want to spend the entire $100, you could some beans and rice in any mix that totals $100 ( for instance 32 pounds of beans and 68 pounds of rice and still have $1.00 left over). But the point is that you would never, ever, buy more beans when the price rises. And this is exactly what fund managers do if they are worried about their “rating”. These fund managers buy more stocks that have become more expensive (think beans) because the price went up. And they sell stocks when the price goes down (think rice). The reason nearly all portfolio managers do this is that they are worried about their ratings. And their rating depends on how well they perform compared to a benchmark (like the broad US stock market S&P 500). So, for instance, when technology becomes 1/3 of the index, the funds need to have 1/3 invested in technology to keep up (so they have to buy more beans). That’s the problem. Most funds aren’t run by a portfolio manager managing his own money. Instead the person managing the fund has to keep rating high so that he can keep his boss happy. He isn’t managing money like he would his own. We would argue these fund managers are portfolio managers at all. They are clerks taking orders. The clerks taking orders from bureaucrats more worried about keeping beans and rice in balance than they are about minimizing risk or maximizing return. This problem is so widespread that there are even pension consultants advising “risk managers” to look at funds and evaluate them based on how closely they compare to the index. Which means these fund managers (clerks) have to buy more beans when they are expensive instead of buying the cheap (or relatively cheap) rice. Which means someone is going hungry. Or has to retire later. Or has to live on less money. It’s more complicated than rice and beans but you get the gist. When technology was 1/3 of the US market in 2000, 1/3 of Joe’s investments were in technology stocks. In 2007 finance was ¼ of the market (so were Joe’s funds). When shares of the bank stocks dropped nearly to zero (some did and most should have), Joe last half of his savings and couldn’t’ retire until 2012. The more you learn about how these clerks, taking orders from bureaucrats, working for publicly traded companies manage Other People’s Money differently than they would their own, the more you realize you should be invested alongside a real portfolio manager investing his money like he would your money. Because he wants to avoid losing money that he can’t make back. Because he doesn’t ever want to go hungry or for you to go hungry. Because he manages your money like he manages his own money. Because he has skin in the game! Investors managing their own money, not overseen by bureaucrats and often working for PRIVATE companies (that can put their clients’ interests first instead of the company shareholders’ interests first) actually avoided investing in technology in 2000 and in finance in 2007. They didn’t buy expensive beans! This is an excellent insight to keep in mind. We believe funds will always be managed this way. Which means there will always be an opportunity to buy cheap beans. #2 Pay for Play: Private Contracts (that you can’t see) determine which products and services get into your portfolio. Just like a cancer patient has trouble understanding the specifics of their problem (and treatment) from an Oncologist, few investors have any idea how financial services companies (companies) make money. Until we learned this from a friend starting a mutual fund, we never knew that hidden, private, contracts determine how products and services are distributed. Which means you can only buy investments (mutual funds and variable annuity sub accounts) that have been approved by the company for distribution. These investments are good for the company but not necessarily good for you. It is the rule rather than the exception that companies require enormous upfront fees (up to $250,000) before these companies can even offer the investments! Even worse – the graft continues. These same investment companies have to pay a large ongoing fee to stay on distribution platforms. This fee is typically 0.40% at banks and brokerage firms (including so called no transaction fee funds at discount brokerage firms). In other words, an investor owning a fund worth $100,000 pays the brokerage firm $400 per year for the privilege of owning the fund. There is no way you could know this. We know because we have friends who started funds and were made to play these egregious fees. For example when our friends at International Value Advisors (IVA) started a fund, Merrill Lynch wanted $250,000 and 0.40% fee simply to get on their platform. The owners of IVA refused, taking their business to discount brokerage firms like Schwab and T.D. Ameritrade (brokerage firms favored by independent Registered Investment Advisors). Eventually, after enormous pressure from advisors at Merrill Lynch, IVA agreed on a renegotiated deal before finally closing their funds to new investors at Merrill Lynch and other major wire house brokerage firms in 2011. The reason for closing the funds was to avoid the asset bloat problem. Because IVA can control asset growth by avoiding distribution with the big banks, IVA continues to allow new purchases of their fund through select Registered Investment Advisors at firms like Schwab Institutional and T.D. Ameritrade Institutional. Another great example of a fund company that is not available at the big banks and brokerage firms is Grandeur Peak. The founder of Grandeur Peak, Robert Gardiner, ran several funds at Wasatch with some of the best track records of any investment companies. Because he didn’t know how quickly he would attract assets, he sought distribution through the big banks. But when his funds grew very quickly he closed them, opening newer funds. The new funds were offered primarily through channels where Independent Registered Investment Advisors work. Again, to avoid the “asset bloat” problem. Because Grandeur Peak does not have to line these firm’s pockets (most of their investors use the lower cost institutional funds) they can keep fees relatively low and focus on what they do best. Research. So let me just explain again how this impacts you. Because some of the best investment firms won’t engage in this pay to play behavior, you simply cannot buy them there! The enormous source of pay to play revenue (legally this is called revenue sharing) provides the big banks and brokerage firms with a steady and reliable source of income to fund their tremendous marketing efforts. Remember the last time you were enticed to move your investments to another firm by an ad on TV? It may have involved a free IPAD or even cash. Now you know why. And it is the reason so many investors have little trust in financial advisors, bankers, and life insurance agents. You are unlikely to see your local Registered Investment Advisor advertise on TV (unless he has other ways to make money like through the sale of extremely profitable insurance products). And this is only one of the many sources of revenue… You are highly likely to see advertisements (especially local advertisements) by insurance agents posing as investment advisors. Because this also extremely profitable for the companies selling insurance. #3 Your Financial Advisor (most likely) works for a Company putting Company interests before your interests. Because the overwhelming majority of Financial Advisors work at Publicly-Traded Companies (who have to put their interests before yours). The same companies that may be excellent investments (as an owner) are not companies excellent for you to invest with (as an investor). The overwhelming majority of investors have their money invested with a publicly-traded company because their advisor works for a publicly-traded company. The problem with this is that publicly traded companies are legally required to put the interest of their shareholders (people who own shares of their stock) before the interest of their clients. As an investor in a company, this is exactly what you want. You want to make sure that the folks running the company are working in the interests of the folks who own the company. But as an investor looking for someone who will always put their interests first … this presents a conundrum. It is literally impossible to put shareholders (folks that own shares of the company) first AND clients’ interests first. Over $37 trillion is invested in openend funds globally. This staggering amount is over twice the annual value of the US economy ($18 trillion a year). That’s a lot of money. Hardly any investors know how banks and insurance companies make money. But they can see that Banks and insurance companies will do anything to get their hands on money. One easy place to get it is from the fee that mutual funds charge. The average expense ratio of US equity funds is 1.3% (2016 Investment Company Fact Book). Which means the fees to funds are hundreds of billions a year. There is so much money at stake. #4 Bankers Behave Badly because Their Bosses Make them Do it – They make them “Cross Sell” Because these companies must put their shareholders’ interests first, they create all kinds of schemes to make sure the people working for the company do so. This results in some pretty bad behavior. We call the practice of trying to maximize revenue from clients Cross selling. Cross selling is the way the big banks (in particular) use every arrow in their quiver to make money. Because they already have you have a client they can offer you their many goods and services. Remember the last time you talked to someone at the bank? Were you asked to: - Open a line of credit on your home (or refinance your mortgage)? - Open a new credit card account? - Roll over your 401k? - Consider a “no risk” annuity for your investments? You didn’t go there to get investment advice. You went there to deposit a check or get money. Banks are in the business of making money. But you might not know the bank has a legal duty, a fiduciary duty, to put shareholders’ interests before clients’ interests. Wells Fargo is one of two banks in the US that is so profitable it earns a Morningstar “wide moat” status, meaning it will likely make more money than competitors (for 20 years or more). If you are a shareholder (and own the stock), then Wells Fargo is a great business. That’s why Warren Buffet owns shares of it. He owns it because Wells Fargo is one of the best in the business at cross selling. But Wells Fargo might not be such a great business for you as an investment client. Remember, if shareholder’s interests are first, clients’ interests are not. September 2016 Wells Fargo got caught in illegal activities that were a direct result of putting shareholders’ interests before clients’ interests. Employees secretly created millions of unauthorized bank and credit card accounts without client permission. They did this under pressure from their CEO. 5,300 employees were fired because they unethically tried to meet high sales targets. Can you imagine the pressure on those employees? Every publicly traded company is required by law to put shareholders’ interests first. Bank of America, Raymond James, Morgan Stanley and others MUST put shareholders’ interests first. Now imagine the lengths these companies will go to make money advising investment clients. You see, in addition to putting shareholders’ interest first there are other conflicts. Banks can be paid by clients, but also mutual funds and insurance companies, and can profit from proprietary trading. These banks are not like George Bailey’s bank in It’s a Wonderful Life (a favorite movie of mine). The more you learn about these conflict of interests, the more you realize it doesn’t make sense for serious investors (and your friends and family) to invest with a bank (or insurance company but we will talk about that on a later date). What would it be like if you could work with an advisor who would always put your interests first? Unfortunately this world is a very small one. Financial advisors will advise based on how they are incentivized to advise. Because most financial advisors work for a publicly traded company, most of the time they have a legal duty to put their company’s shareholders’ interests before yours. This means that if your advisor is employed by a bank or insurance company, odds are good that he has to put shareholders’ interest first. The more you learn about how financial advice is given the more you find yourself becoming upset. So now let’s focus on some of the thought leaders and “experts:” #5 Incentives to Make a lot of money now instead of a little money later can be Impossible for Advisors to Ignore (Why you should run away from life insurance agents selling you “investments”) Imagine that you could take a pill and instantly lose 20 pounds or be able to run a 3 hour marathon. You would, wouldn’t you? Remember all the commercials you have heard about miracle products and diets that will do this? Now imagine that you can get paid a bunch of money today (for making a quick sale) versus getting paid a little money every 3 months, for ongoing work? Which would you prefer? That literally and exactly explains the conundrum that any “investment advisor” who has an insurance license faces. Brokers (or insurance and investment products) can make this choice: to get paid a bunch of money today simply by convincing their clients to make a onetime purchase. Unscrupulous life insurance agents sell their clients products that easily pay the equivalent of ten years of investment management fees. And to do that all they have to do is make guarantees. Guarantees that you will not lose money. Sometimes guarantees that you will make a minimum percentage of money. The problem is that these guarantees, under close scrutiny, are not worth very much at all. Most of the guarantees are about as helpful as having flood insurance on a mountain home. You don’t need it. We believe the most egregious conflict of interest of all (and this takes some doing) is that insurance agents can be paid up to 10x more by selling insurance than they would for a year of advisory fees. This is why unscrupulous insurance salesmen are so active advertising on local radio and are scrambling to make life insurance sales before they are made illegal in IRAs April 10, 2017. But that’s another story. #6 Advisors use “Social Proof” like Fancy Titles, clothing, and cars to make you think they are good at their job. But it just means they are good at sales. Financial Advisors (or at least their bosses at the publicly traded companies where they work) know that investors respond to a principle of influence known as social proof. In order to take advantage of this they dress well and have fancy titles. Imagine you know what these fancy titles actually mean. Titles like Vice President, Assistant Vice President, First Vice President sound very impressive indeed. But the more you learn on how they are earned, the less respect for them you have. These titles are literally bestowed based on how much cumulative production credits the advisor has won. When a financial advisor reaches a certain level, he gets a “promotion.” Alternatively they can be given out to suggest that a particular advisor is appropriate for a certain wealth level. However this is done, no consideration is given to other designations which mean a great deal. There is an alphabet soup of titles. Many of these can be obtained by taking a one day class and have very low continuing education requirements. For your purposes regarding financial planning and investments, there are two that are useful. Certified Financial Planner is a designation given by the CFP board meaning an advisor exhibits a minimum competence in areas including tax, retirement, financial planning, investments, and estate planning. This is a rigorous program, so rigorous that many lawyers fail this test the first time because they underestimate its difficulty. The other useful designation is Certified Financial Analyst. This is considered the hardest designation to obtain. While working on Wall Street, my employer suggested employees obtain either an MBA or a CFA designation. Lesson: for competence on planning, turn to a certified financial planner™, for competence in investing look to an investor’s track record, experience and training. Excellent investment managers have a CFA, a MBA, or years of successful experience as an analyst and portfolio manager. Most other fancy titles don’t mean much. #7 Asset bloat kills investment return and makes funds riskier and riskier Asset bloat happens when a mutual fund gets so big that it can no longer be managed the way it was originally intended to be managed. Asset bloat causes an excellent fund to look more and more like an index. So it generally starts to get the return of an index (less its fee) with all the risk of the index. Asset bloat is often a tragedy of excellence. Funds that are very good in their younger days perform more and more poorly as they gather assets. There are many examples of this. Perhaps the best is the Fidelity Magellan fund. From the time Peter Lynch launched the fund until the mid-1980s (when it became the largest fund in the US) the fund shows substantial outperformance to the index. The chart below shows the annual performance of the Fidelity Magellan fund in relation to the index (S&P 500). As you can see, the outperformance fell toward zero and eventually (after 1990) disappeared (not shown in the chart). Even worse, funds that have historically done very well during periods of turmoil tend to become large and become more risky. At the end of 2013, we had a look at the 15 largest funds to determine their risk. We even gave them an ulcer score to measure the combination of the drop and time period before recovery (high is bad). The chart below illustrates that the 15 largest equity funds actually fell more (on average) than the index during the 2007-2009 financial crisis. These same funds, however, did much better than the index during the 2000-2003 Dot-com bubble. 2000-2002 Downturn (26% Breadth) Category S&P 500 TR MSCI World PR 15 Largest Equity Funds Ulcer Score (2000-2002 Downturn) 10.0 11.5 7.8 Period Drawdown -38.3% -44.9% -28.4% 2007-2009 Downturn (5% Breadth) Ulcer Score (2007 downturn) 5.9 11.0 6.3 12.0 4.4 11.5 Years To Recovery Period Drawdown Years To Recovery -54.5% -58.2% -54.8% 5.1 6.5 5.4 Average Asset Size (Millions) $ n.a. n.a. 117,408 These funds had an average asset size of over $117 billion. While there is some disagreement on how big is too big, we feel confident it becomes increasingly difficult to manage an all-cap equity portfolio at about $20 billion in size. Which means, where possible, we strive to find investment managers smaller than this. A 2004 study done by Princeton Professors Chen, Hong, Huang and Kubik, “Does Fund Size Erode Mutual Fund Performance” In the American Economic Review proved that larger funds have worse performance and higher risk. This ulcer analysis is a typical risk analysis we do on prospective client holdings. Because we typically manage our clients’ serious money, we like to avoid 50% drawdowns and 6-12 year recovery periods, striving for drawdowns half of this and recovery periods of 2-3 years from worst. #8 It’s not just your advisor. It’s you. You are literally never rational. You always rationalize. Because your advisor knows this, he can take advantage of you. Followers of the 2016 Presidential Election got the treat of a lifetime. Out of nowhere a reality TV star and real estate investor came to win not only the Republican nomination but also to become the 45th President of the United States. And no-one predicted this. With a notable exception. Dilbert Cartoonist, Scott Adams predicted that Donald Trump would become the 45th President of the United States (that he would win in a landslide) in August of 2015.” Mr. Trump was the first Master Persuader to appear on the American political scene since Ronald Reagan and Bill Clinton. Mr. Trump did not win in a landslide (probably due to a compromising video that would have harpooned anyone else). But he did win, surprising everyone. The reason he won is that Mr. Trump is a “Master persuader.” Mr. Trump understands the science of persuasion and applies it daily. Which means he understands how to use language to stimulate an emotional response and cause a favorable reaction (to his agenda). The reason this phenomenon exists is rooted in our biology. Because we are not logical animals, not Vulcans. We are human beings. We don’t have to imagine a world where we are all Vulcans. But the more we realize that we are not Vulcans, the more we can understand as human beings we will make human mistakes. Human beings are not driven by a logical imperative. Instead, we find reasons after the fact to justify why we make important decisions like investment decisions. For example, when the market is going well, we tend to rationalize that it is a good time to invest because other people are investing and they have made a lot of money. And then we invest. On the other hand, when the market is going poorly, we see others getting out. And then we sell. It is easier to hold cash because it eliminates the worry of losing even more. The problem is, that as soon as the sale occurs, the loss is recognized. It’s not on paper any more. Money has been lost that cannot be made back. There is a biological reason for this. We don’t have a single brain. Instead we have three brains: The forebrain, the limbic brain, and the cerebellum. Each brain operates by itself. The first brain is the forebrain or neocortex, this is where we think rationally. The second brain, the limbic brain, is about the size of a lemon and is responsible for regulating internal chemical order. The third brain is the cerebellum, at the back of the brain. This is the oldest brain or the reptilian brain and considered by many to be the seat of the subconscious mind. We call this the crocodile brain. All three brains have a different job. The Neocortex is the learner. Every time it learns it strengthens the hardwiring in your brain. Remembering maintains and sustains those connections. These networks have an electrochemical component. This can be mapped with current technology. The mind is the brain at work. Whenever you have an experience you have a feeling. This feeling causes your second brain, the limbic brain, to release a chemical. This release stimulates memories associated with that feeling. Negative feelings, like stress or fear, activate the crocodile brain. Just like seeing a lion would cause our more ancestors to freeze, so too does uncertainty or the sense of loss. The sensation is not fight or flight. It is freeze, fight or flight. Unfortunately, this is well known by marketing professionals. The science of persuasion is well documented and has been used since time memorial by unscrupulous salesman to take advantage of a mark. The big banks, brokerage firms, and insurance companies all know how you make decisions. This is a science and not a new one. Behavioral psychologist Robert Cialdini wrote a book about this in 1984, Influence, the Psychology of Persuasion. He lists 6 principles that many a salesman have memorized in order to manipulate you. Daniel Kahnemann won the Nobel Prize in Economics in 2002, for proving that not only are we not rational, but that we are perfectly, predictably irrational. Because we are hardwired to react in a certain way, when certain events occur. I know that even my “smartest,” “most experienced,” “best educated,” and other clients can easily fall prey to this persuasion. The reason for this is that when confronted with uncertainty, as human beings we tend to find something to reduce that uncertainty. Often there is no real answer, so we will find an answer supporting our existing belief systems that seems to reduce the uncertainty. Before I talk about some examples of how people get taken advantage of, first I want you to do an exercise to demonstrate a point. What to Do About It We know investors are STARVING for good financial advice and portfolio management structured to avoid losing money you can’t make back. Investors have been taking such bad advice from experts that they made only about 3.2% per year in the world’s largest equity fund (as of mid-year 2016) for the last fifteen years. When you have serious money, and your objective it to avoid losing money that you can’t make back, it is time GRADUATE to a Serious Money Private Fee-only Investment Advisor. (Only for your serious money) We recommend you: 1. Find a truly fee-only (not just fee-based) financial advisor. In order to be fee-only your advisor can’t be paid by anyone but you. Which means he cannot have a securities license and he cannot have an insurance license. Fee-only advisors are investment advisors employed by Registered Investment Advisory firms (not a bank, brokerage firm, or insurance company). 2. Seek an advisor working for a PRIVATELY HELD Registered Investment Advisory firm. Remember public companies are legally required to put their interests first. Which means there will always be a conflict of interest between what you need and what the company wants. Because their objective will always be to maximize profits for their company shareholders. 3. Ask you advisor how he invests his funds and get him to put this in writing. Does your advisor invest in the same things he has you in? 4. Never confuse insurance with investments. Remember if your advisor can sell insurance, he will. Which means you should run away from investment advisors who can also sell you insurance. You deserve better. At Global View, we manage money like we manage our own. We have SKIN IN THE GAME. We aren’t for everyone. But if you are ready to graduate from a big bank or insurance company to a fee-only fiduciary we should have a conversation. Author: Ken Moore, CFP® please excuse any errors in this draft. 12/29/2016 Contact me directly [email protected] or call 864-335-9211 www.globalviewinv.com/conflicts