A Warning About Your Financial Advisor

by Andrew Zatlin

Andrew Zatlin here with a brand-new issue of Moneyball Economics.

At first blush, the idea of having a Financial Advisor sounds pretty sweet. After all, who wouldn’t want an expert looking after your portfolio, and ensuring that you’re making money in the market?

But what if I told you that these advisors almost never have your best interests at heart?

Sadly, it’s true. And in my latest video, I’ll explain why.

For a full transcript of this video, see below.

A Warning About Your Financial Advisor

Hi, I'm Andrew Zatlin…

And welcome back to Moneyball Economics!

Today I want to take a minute and do a Moneyball Economics “Public Service Announcement.”

Look, you probably aren't like me. You don't have the luxury of looking at what's going on in the stock and bond markets every day and making quick moves.

So you're probably relying on experts — the kind of experts who are supposed to have your back and do things like protect your investments and grow your wealth.

And you probably believe that, if you have a financial advisor, he or she is actively watching out for you.

And I really hope you have that kind of advisor.

The thing is, if you're like most people, I'm afraid to tell you…

You don't!

So today, I want to talk to you about the financial advisory business. That way, you can make sure that you've got the right person watching your back!

Hush Money

To start, I’m going to share some deep, dark secrets with you…

Because financial advisors will tell you the exact opposite of what I’m about to tell you.

Let me tell you why:

The short and dirty answer is that financial advisors are paid to [Zatlin with emphasis] keep you quiet.

And so everything they're going to tell you is geared toward their strategy of:

  1. Taking your money.
  2. Putting it into some funds or ETFs.
  3. And then walking away! Sure, they’ll check-in every so often, but they won’t be doing very much at all.

The thing is, that's dangerous in times like these, when the markets are constantly changing.

You need somebody who's actively watching out for you.

So I'm going to share some tips and ideas with you for how to make sure your advisor is indeed watching out for you — essentially, I'm going to pull the curtain back.

Let's get into it.

It’s All About Access

To start, you need to ask yourself: What is your financial advisor really providing to you?

Often the answer is access — access to a lot of really good intelligence.

That's a key factor to consider. They may not have this intelligence, but they've got access to it.

And the next thing you want to ask is: What are they doing for you? How are they getting paid?

Because at the end of the day, how they're getting paid determines what they're doing for you.

Don’t Forget… It’s A Business

Before we go further, you need to understand that the advisory business is a franchise business.

What that means is that your advisor has partnered with some bigger firm…

And the bigger firm is providing some essentials.

For example, it’s providing office space, and some type of office support.

But it’s also providing your advisor with what you, the investor, want above all else:

Intelligence, analysis, and reporting.

Now keep in mind: you can get a lot of this data through your generic broker — for example, a broker like Charles Schwab.

So why are you paying money to an expert?

Well, often because they can bring in more access than a Schwab advisor.

More Bang for Your Buck

Often, these experts are bringing in an accountant to take a look at what you're doing…

And they’re going to provide benefits — for instance, making sure your taxes are in order, and giving you advice on how to leverage certain tax rules.

But for right now, let's talk about your financial advisor exclusively as your wealth manager — someone focused on your stock and bond portfolio… in other words, your assets.

Sharing the Wealth

Believe it or not, your advisor is capped at how much money they can make on you.

By law, they can only charge you 1.5% annually on your total account. That's it.

Now keep in mind: in a franchise business, that percentage is what the company gets. Your advisor only gets a portion of that — maybe half a percent.

So if you give your advisor a $1 million portfolio, you're probably thinking, “Wow! I'm giving you a lot of money! You're definitely going to be carefully watching over my money.”

The thing is, that’s probably not the case. Because in this example, $1 million only gets your advisor $5,000 a  year.

As such, their interest in your portfolio is essentially going to amount to a quarterly phone call, if that often.

So how do we get more than that out of your advisor? That's the key question!

How do we make sure that the incentives are aligned?

As Little Work as Necessary

Truth be told, financial advisory is what’s considered a “low-touch” business model. The advisors want to take your money in, and they want to “standardize” you — essentially do as little as necessary.

They can do that because, chances are, you fit in a certain bucket, along with many other investors. And you and hundreds or thousands of others like you can be traded and managed simply and easily, and engaged with as little as possible.

That's the model you're in — unless you've got an exceptional advisor who's outside of the norm.

The Typical Investor Experience

This model makes for a fairly typical experience with an advisor:

First, you’ll come in and sit down with them. And there's a “getting to know you” tool that they'll use that looks so fancy.

Essentially, this is a deep dive into your assets, your income, and your family.

“Do you have a home?” they’ll often ask. “What are your financial goals?”

And at the end of it, they’ll tell you, “This is what we think you ought to be investing in. This is your ‘risk appetite,’ meaning this is the kind of place you're going from an investment perspective.”

And then once you agree, out pops a report that says:

“Guess what?!? This is where we're going to take you. We're going to put you and your money into this kind of asset portfolio. We're going to allocate this much to bonds and this much to stocks. We're going to do this, that, and the other thing. And we'll talk to you soon.”

And after all that, you say to yourself, “Wow! This is fantastic! They're watching out for me. They've got computers. They're harnessing millions of hours of insight and years of expertise. And they're watching out for me!”

Unfortunately, they’re really not.

The “Bull Crap-Ometer”

This is where we break out the “bull crap-ometer.”

They've got your money. They've got you started. And now they'll update you every quarter.

But in reality, what you signed isn't a guarantee. What you signed was legal protection for them.

They got you to acknowledge that you have certain expectations, and therefore your risk is at a certain level.

And they’re free to do whatever they please and point back to this piece of paper and say, [Zatlin mocking tone], “Aha, they signed it! They knew what they were getting into.”

Now, make no mistake: you're going to get some intelligence. You're going to get something, even if it's basic.

It might be more than you’re used to getting. It might be a huge advancement. But remember, it's not really personalized.

You're like anybody else out there. Do you know how many people have stocks, and are considered “family people,” and have homes, and are in their 40s or 50s? A ton of people.

In other words, there really aren't a lot of variations when it comes to investor demographics.

And so typically what'll happen is advisors will try and get you in, figure out which of these limited variations you're in, and then — boom! — put you into certain funds.

A “Freakishly” Good Example

Let me explain this experience to you by using an example.

Let's use a different business, but one that follows a similar business model in terms of how the compensation flows.

If you've ever read the book “Freakonomics,” you might remember a chapter that looks at real estate agents.

They found that, if real estate agents owned their own homes and were selling them (as opposed to representing a client and selling the client's home) their homes would stay on the market a lot longer.

They did a lot of analysis. And what they found was that compensation was driving behavior.

In case you’re unfamiliar with the real estate business, when a seller sells a home, they give up 6%.

So if a house sells for $1 million, $60,000 will be split amongst the buyer’s agent and the seller’s agent, and the seller’s agent starts out with about $30,000.

But keep in mind: just like with advisory firms, this money goes to the parent company. So of that $30,000, the selling agent might wind up with only about $10,000.

So at the end of the day, a $1 million home generates $10,000 to the seller agent personally.

Considering that fact, agents have to sell a lot of homes in order to make a good living. And guess what? You could sit there as a seller and say, “I’m going to wait a little bit. I think I can get $20,000 more. I like their offer, but I think I can get a better offer.”

And why not? $20,000 is $20,000. But guess what?

Going back to that math from the example above, of that extra $20,000, 3% goes to the seller's firm. That’s $600. And of that amount, it's split $400 to the firm and $200 to the real estate agent.

Do you really think the real estate agent is going to sit there and hustle for another $200?

You as the seller like the higher price — you get an extra $20,000! But they get almost nothing. It's a waste of time for them…

And that's exactly the situation with the advisory business.

In other words, you’re just a waste of time to them.

It Doesn’t Always Pay to Play

Of course, you could ask your advisor to be more aggressive. You could say, “I want an active money manager! I want to get another $100,000 out of the stock market!”

Well, guess what? To meet that goal, your advisor would have to hustle and work hard…

And in the end, they’d get an additional $500. That’s it.

As it stands, you're not really giving them a reason to be actively engaged, because there's a lot of risk and a low return. Best-case scenario for them: an extra $500 or $1,000 goes into their pocket. Worst-case scenario: things don't go the way they want, and they take on a lot of risk.

So what do advisors do? They figure out generally where you should be: how much stock you should hold, and in what kind of sectors. And they put you in funds.

They put you in funds because that's easier to manage. There's less expertise. They don't have to worry about what's actually happening with an individual company like Intel, for instance.

They can just monitor whole sectors like semiconductors or “high-tech.” They don't have to worry about individual names.

Another Dirty Secret

And here’s the second dirty secret:

If the first dirty secret is that advisors don't get paid that much to deal with you…

The second dirty secret is the way they “juice up” their income by putting you into funds that give them what are known as kickbacks.

Does that surprise you?

It shouldn’t.

After all, mutual funds and ETFs do, in fact, provide kickbacks to financial advisors.

Not a lot, mind you, but every little bit counts. And it goes directly into their pocket — not the firm’s.

Another way to increase their income is working for firms that might offer “in-house funds.”

What’s important to know is that an in-house fund gets to avoid the usual fees that are paid to another mutual fund and receives a kickback — they get to “double dip.”

If you’re put into in-house funds, you need to call a [Zatlin blows a whistle] “timeout” — and you need to look at them.

If they tell you that the performance “varies,” be skeptical.

Keep in mind: the benchmark is the stock market. Never let a financial advisor try to tell you differently.

The S&P 500 is the benchmark. If you’re not earning more returns than that, you should have a lot of questions for your advisor.

Keep Watching for the Red Flags

So, to recap:

The first red flag is being placed in in-house funds.

And the second is earning returns that don’t at least keep pace with the stock market.

Now typically, when you're young, advisors will put you into more stocks. And as you get older, they’ll shift you to more fixed-income-based investments. And as always, they’ll say “see you next quarter.”

No matter your allocation, the stock market is almost always bullish.

If you look at it over time, it's always going up. And then you'll have a brief recession where it goes down. And then it goes right back up.

So as an investor, it's really simple…

If you're going to have somebody who's not paying attention to your specific ideas, or if they're not actively managing your money…

You need to get a different advisor.

And keep in mind: there will be times when you want to get out of stock market. Those will be brief periods, generally right around recessions. And then you need to get right back in.

And you don't need to pay an expert for that advice. You want to pay for someone who's looking out over the horizon and saying:

“You know what? I don't care if you're young and you should be in stocks. I think the market's going down. Let's do some course correction. Let's manage a potential recession.”

Or someone who tells you the opposite. “Hey, we’re through a recession. The economy's going strong. Let's get you more exposed to high-risk stocks that benefit from a growing economy.”

Worth Their Weight in Gold

The key point to understand is that your financial advisor is most likely not watching what's going on.

They're not paid to…

And quite frankly, they don't care.

You may have the exception. You may have an advisor who is focused and is a really good stock picker.

[Zatlin pleads] If so, share their name! Those guys are worth their weight in gold.

But the typical financial advisor isn’t really paying attention.

So what you're really getting is access to some cutting-edge analysis and insights — not from them, but from their parent company.

And it may mean that you have to do the heavy lifting, because your advisor sure won't be doing it!

This has been my “Public Service Announcement.”

“Zat-man” out.

Talk to you soon!

In it to win it,

Moneyball Economics