Posts Tagged ‘Conflict of Interest’
New Year’s investment resolutions
After working as a financial advisor for six years and after reading tons of research, I have developed a good sense about how the average investor loses money. As the New Year approaches, I think it’s good to share my insight so that readers can determine if they are making these mistakes.
Conflict of interest
I cannot emphasize this enough: Wall Street firms don’t work for you. If you have a Merrill Lynch or Morgan Stanley advisor, expect to give away 2.5% of your money every year – about half of it will be in explicit fees, the other half will be in hidden fees. If you invest through insurance products, expect to give up 3.5 percent of your money.
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New York Stock Exchange
When talking to prospective clients, I am upfront about what I can and can not do. I can NOT beat the market.
Recently, that straightforwardness caused me to lose a prospective client to a major Wall Street firm. Apparently, the financial advisor from that firm was able to convince him that with their exclusive location, expensive brochure, and nice Armani suits, they could beat the market.
This led me to do a mental exercise.
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Is a round of golf all the value you get from your financial advisor?
Why do you charge me 1% every year regardless how well you do for me? I would rather not pay you anything for the first 5% return and split anything above and beyond that.
This is a question a prospective client of mine asked me. Let me explain why this fee arrangement is not in the client’s best interest.
Historically, the mean return of the market is 10%, and the standard deviation of return is 15%. This means the market is equally likely to go up 25% in one year and go down 5% in another.
Despite what they want you to believe, financial advisors have very little control over the market.
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A Balanced Portfolio to Avoid (III): Most Financial Advisors Are Not Fiduciaries!
Posted on: April 30, 2011
My friend is a savvy businessman. However, like most Americans, he has a misconception: he thinks financial advisors are legally bound to put clients’ interests first. This can not be further from the truth. Everybody and his grandma can be a “financial advisor.” Unlike being a “physician”, there are neither legal requirements no educational qualifications. Whether a certain financial advisor is bounded legally to act in his client’s best interests all depends on his true profession. Here is an ad hoc summary:
| Professional Title | Fiduciary? |
| Attorney | Yes |
| Certified Public Accountant (CPA) | Yes |
| Registered Investment Advisor (RIA) | Yes |
| Financial Planner | Maybe |
| Certified Financial Planner (CFP) | Maybe |
| Wealth Manager | Maybe |
| Insurance Agent | No |
| Registered Representative | No |
| Stock Broker | No |
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Few people know that there are 2,613,000 financial advisors in the U.S. It is the fifth largest vocation, right after truck drivers and before janitors. Even fewer people know that, unlike attorney and CPA, financial advisor is a free title – there is no uniform legal standard or educational requirement for the title. Nobody will get into trouble calling himself or herself a financial advisor.
In practice, there are two types of professionals who call themselves financial advisors: registered representatives (aka brokers) and registered investment advisors (aka RIAs).
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and this will happen.
What will happen to your money if you hire a salesman as your financial advisor
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“Avoid the fee-ing frenzy,” says David Swensen. 
Marion banks at Wachovia. When she needs to rollover her 401(k) into an IRA account, she naturally asks a Wachovia financial advisor for help. He helps her open an account and recommends she buy the Evergreen Asset Allocation Fund (EAAFX). Is there anything wrong with this picture? Plenty!
First, the fund has a sales charge (front-end load) of 5.75%. Her 401(k) balance is $100,000. This means, the advisor takes $5,750 just for the act of opening the account for her.
The Investment Scientist 