Bryan Binkholder Discusses The High Cost of Bad Investment Advice
Are you looking for an investment without any risk? You’re not going to find it. Is your financial advisor talking about an investment strategy that will protect you from the volatility of the market and the coming recession? If so, I strongly suggest that you fire him immediately. (I’m not kidding)
The simple and unchanging truth is this: There is no way to predict the future, so there will always be risk involved with investing. The brokerage firms know this, mutual fund managers know this, and financial salespeople know this. Yet they all claim to have insights, information, and stock picking skills that give them a clear advantage, –and of course, they want to pass that advantage on to you. False.
Investment advisors are a dime a dozen and financial planning is frankly a sham since it’s done to ‘sell things’ to unsuspecting investors. The shining stars come and go year after year, –generally with a great deal of publicity when they are “predicting” well. Investment magazines “ooh and ahh” over the most recent darling of Wall Street, and then quickly sweep his remains under the rug when he falls off his pedestal and fails to deliver.
Goldman Sachs’ Recent Recommendation
On June 21, 2012 the financial markets sold off partially because of the Goldman Sachs sell recommendation on the S&P 500. The excerpts below show that no one can predict the future, especially not the Wall Street bullies.
Published Wednesday March 21, 2012 Goldman Sachs, in a sweeping report to clients said, “Right now is once-in-a-lifetime opportunity to buy stocks,” which the firm went on to say were undervalued after 20 years of relative underperformance against bonds.
Then, exactly three months later…
Published Thursday June 21, 2012 “We recommend a short position in the S&P 500 (^GSPC) index with a target of 1285 (roughly 5% below current levels) and a stop on a close above 1390. This morning, the Philly Fed print of -16.6 down sequentially and worse than expected, provides further evidence that weakness has extended into June.”
On March 21, 2012 the S&P 500 closed at 1393. On May 1, it closed at 1406, a 0.93% increase and on June 21 the market closed at 1326. In summary, from the strong buy in March to the strong sell recommendation in June the market dropped -4.8%.
Following the recommendations of prestigious firms such as Goldman Sachs are disastrous to your financial health. The Wall Street bullies, including banks and insurance firms, do not have your best interest in mind. Their only goal is to make as much profit as possible. Remember, they are not fiduciaries. They don’t care what you do, –buy or sell, just as long as you keep trading. This keeps the money flowing and ensures their ability to skim off the top. Brokerage firms make their money when you trade, so they will skew their advice to the latest news story. They’ll say anything to keep the public trading. Unfortunately, most of us can’t afford to simply “keep trading.” A few bad decisions and “investment gambling” scenarios can ruin us financially.
As you know, my investment strategy is simple and proven and I don’t believe in taking advice from anyone but a Registered Investment Advisory Firm. There is too much conflict of interest in the financial services industry and the chance that you might pick the one moral individual who is genuinely more concerned about you than his commission check is certainly not worth the risk. Even when financial advisors try to do the right thing, they are often inexperienced and are simply selling from a list of “preferred funds” which are often in direct opposition of the investor’s goals.
The Cost of Bad Investment Advice
Your financial advisor will not always be right, even if he has your best interests in mind. This is to be expected. As I said at the beginning of the article, there will always be a certain amount of risk, but when your investments are based on sound judgment, recovering from a mistake is generally not that difficult. On the other hand, here are the types of decisions and poor advice that can (and often do) result in a significant loss of finances for investors.
- An Advisor with Self Interests – Financial advisors who are not held to a fiduciary standard (and many are not) operate in one of two ways. They either have a lack of knowledge due to being new in their careers (so they sell what they are taught to sell, never digging deeper), or they are self serving and view their clients as profit centers. We don’t like to believe this, but many financial advisors are simply looking at your nest egg and viewing it as their next trip to Cancun or their house payment. Don’t underestimate what people will do for money. If you are not talking to a Registered Investment Advisor, you should be!
- Excessive Trading – There is a fine line separating “active trading” practices and “account churning”, which is an unethical and dishonest practice that involves excessively trading a client’s account. Advisors whose only interest is to generate more income for themselves will find reasons to actively trade a client’s account and it’s difficult to prove an advisor’s motive. This is yet another reason to only use a fiduciary.
- High Fees / High Cost Investments – Financial advisors who are looking to maximize their own revenues are not generally looking for low cost solutions for their clients. For example, if you are an investor who sticks with your portfolio and seldom trades, you may be steered into a fee based account. Of course, your advisor will still try to talk you into trading more often, but even if you don’t, the high monthly fees will serve to pad his wallet. Many of the financial products advisors recommend have built in fees or fees wrapped inside of others. You may think you are paying one flat monthly fee for your financial services, when in fact, there are several fees being siphoned from your account each month. Even with the new disclosure rules, many investors will not read, and some may still not fully understand the fees they are being charged. High fees are dangerous. They will eventually erode the performance of your portfolio and cancel out any earnings you would have had.
- Preying On the Uneducated Investor – It’s pretty apparent when an investor doesn’t understand what they need or how markets work and some advisors use this to their advantage. Often they are sold products that appeal to their emotions instead of investments that would meet their long term objectives. When an investor is uneducated, he may not know what questions to ask and the financial advisor is generally not quick to offer information that could be detrimental to the sale. Remember, you may think your advisor has been conducting research and analyzing the market all day, when in reality he is busy making sales calls and sharpening his closing skills.
- An Overconfident Advisor – Depending on when your advisor began his or her career, he may be somewhat delusional about his skills. Mistaking a bull market for brains, the overconfident advisor may start recommending riskier investments or over-concentrating in one sector. Overconfidence is a real threat to your portfolio, especially when your advisor’s luck runs out.
The bottom line here? The cost of poor investment advice is high. When deciding on a financial advisor (or evaluating the one you are currently using), be sure to only deal with a fiduciary. Doing so will ensure that the advice you receive has your best interest in mind. Beware of the sales pitches, the promises, the guarantees, and past performance statistics.
Your financial advisor, regardless of how educated he is, cannot predict the future. Therefore, the only way to minimize risk is by cutting out all unnecessary cost and having a broadly diversified and regularly rebalanced portfolio.
Regardless of what you’ve been told, markets are not difficult to understand. Start by taking advantage of my free resources, 7 Deadly Traps of Investing and The Six Pitfalls of Retirement Planning and continue to follow my blog. Educate yourself and you will never have to feel lost, uncomfortable, or at the mercy of your advisor. It’s your financial future and it’s time for you to take control.