Politics, Investing and Propaganda

I used to look forward to voting when I was younger as I was certain of what I was doing. My lack of sophistication and naiveté made me see things in very simple terms and it was easier to choose between the “right” candidates and the “wrong” candidates. Now, I am jaded, and I realize that everyone has an agenda and some have better propaganda machines. An advertising budget can do wonders in painting either a shiny, albeit inaccurate picture; or a scathing and unfair one. Many investors fall prey to such manipulation, as well, as their “friendly financial consultant” portrays competence, polish and compassion – often times they are simply charismatic and not much else. I know this from experience. In a past life, I worked near these types; and, in my current life, I get to unravel the damage they have done at the hands of their once trusting (and now former) clients.

While not all brokers are incompetent or misleading, the truth is that their business model is. As long as they act as salespeople – fronting for product, and not for their advice, there is a conflict of interest. When a salesperson is paid by a third party (e.g., mutual fund company or insurance company) to recommend a product to their client, there is temptation to make the investor’s needs subordinate to the salesperson’s need of putting bread on the table. The only products a salesperson will likely recommend are ones that carry high sales charges, because a portion of these charges come back to the broker in the form of commissions (mutual funds that have letters, like A, B, C, etc. after their names carry these higher fees). If the fee is low, there is nothing to compensate the broker with. So even though the low-cost fund is a better choice, it will not be recommended to the investor. And, let’s face it, if an investor purchases something that basically tracks the S&P 500 returns, then the fund that deducts 0.15% of a fee will always beat its counterpart with 1.5% -3% fees. It’s an absolute, basic, numeric truth, plain and simple.
Often times the very established brokerage houses have their own mutual funds and insurance products that compensate their salesforce a little extra. Branch managers are enticed to rev up their sales team to make this a higher percentage of the office’s business. This is how bonuses are shaped – which is no small chunk of change. Again, I speak from experience here as I witnessed this firsthand. Branch managers who let their team sell what they want won’t do that for long when a big bonus is at stake. At best, its coercion; at worst, it’s blackmail. So even if a broker or a manager wants to “do the right thing” they are penalized. The only way to get around this is to break out and become independent – which can be daunting for those entrenched in this system.

Most investors have no idea that mutual fund and insurance companies pay money to have their investment products listed on the brokers’ “preferred list,” or included as a 403b option; everyday trusting investors operate under the false assumption that “preferred “means superior when it simply means deep pockets. Again, this model compromises the broker’s judgment. The investor is blissfully unaware often times, and thinks the broker is making the best possible recommendation, when there is another agenda in the fold. While the investor blindly thinks the broker “knows best” the truth is sales pitches are provided and practiced on how to sell the product and how to overcome investor objections. Again, I know this firsthand as I have witnessed sales training sessions; I have written the sales tips to help them sell; I have promoted the sales contests that give a sales rep a crystal paperweight for besting the sales of the other hungry brokers. I have done this all in a past life I feel compelled to redeem myself from. The truth is, I thought that’s how the business worked with no other options – I had no idea at the time of another (less popular, and less advertised) approach.

In the act of full and fair disclosure, I mention that my husband and I own a fee-only Registered Investment Advisory firm, ATI Investment Consulting, Inc. (that means we do not accept commissions, and our clients receive a straight-forward bill from us every quarter). This design was intentional – as we guided my Mother in the aftermath of my Father’s debilitating illness and found lots of hungry salespeople licking their chops at getting a piece. We weren’t even in business at the time; I was in my “past life” where I helped brokers hock products, actually. I didn’t want her to fall victim to this model. There was too much riding on this; namely my Father’s medical care and my Mother’s future financial stability. At the end of this project we realized that we could deliver this to the masses; that this service is truly needed; that we can remain true to investors’ goals; and, that we can save them from being someone else’s prey. It is not as profitable to conduct business this way, but it is good for everyone involved; first and foremost, our clients.

Not too long ago I was approached by an insurance agent who asked me how we handle clients with insurance needs. I mentioned that we advise clients on what type of insurance they need to get, and the amount. He asked me if I had considered getting my insurance license, which I hadn’t. He informed me that if I had that license and didn’t want to sell insurance I could refer all my clients to him, for which I would get a piece of the commission. He estimated he could make me an additional $50,000-$60,000 per year with this arrangement. I know he thought my emphatic “Not interested,” was a Pollyanna response – but we want no part of putting our personal interests ahead of our clients’ needs.
If you are wondering whose side your financial professional is on, go to your statements. The tell-tale signs are easy to spot:

• Funds with A, B, C, etc. after their names carry higher fees which does not benefit you in any way.
• Owning annuities in an IRA or other tax-deferred account, such as a 401k or 403b means that you have paid a high expense to have a tax-deferred product in an account that gives you tax-deferral at no charge (think, paying extra to have a belt, when you’re wearing suspenders).
• Annuities, in general, are very expensive and rarely have I seen this benefit an investor. Occasionally a work-sponsored annuity is paying a very high guaranteed rate – but this is a rare exception.
• The broker who works for XYZ Company has sold you mainly XYZ funds. Or, the college savings plan (529) you were sold has ties to XYZ in some way.

Investing is like the political campaign process – it’s hard to know what to believe, or what to argue against when you feel like no one is telling the whole story. Unless you are prepared to research and get to the bottom of the issues that are important to you, you will easily be swayed by whoever speaks with more authority on the subject than they may actually possess (your friends, your union, your colleagues, etc.). Until you truly examine the motivation of the person feeding you the information (pride; ego; or worse, profit), it is easy to swing in the breeze while others collect from manipulating you. Now that you have been warned, it is up to you to decide how you want this to end, and who wins your business. Choose wisely.