Ten years ago I was having lunch at a local Ypsilanti restaurant, reading Ayn Rand's The Fountainhead
at the bar, when a gentleman next to me commented on the book. That comment sparked a conversation that sparked an apprenticeship that sparked a 10-year career as a financial advisor. At that tender age of 21, I had been set on taking my idealist "I want to change the world" mantra to local government, thinking that was the best way to make the biggest impact. Here, another avenue opened.
This mentor of mine was determined in teaching me that if one does not learn how the money system works, if you do not know how to generate wealth, how to protect it, how to grow it, then your efforts to better your world are fruitless. His solution was to become an advisor, as he had been for 30 years.
I initially thought that was crazy, but eventually relented. I remember having a revelation at the time that I could "change the system as a mole from the inside." In 2004, I became licensed and embarked on an experience that was shockingly difficult, appalling, but magnificently helpful in that original idealist aim of changing the world. Eight years later, that's what I'm doing
This week I'll be sharing lessons I've learned from the inside, so to speak. They're coming from my direct experiences, and those I've worked with over the years. There is a whole flock of well-intentioned advisors who have turned whistleblower
over the last five years as the industry became more and more grotesque and abusive to its clients and employees. Some advisors have had a better experience – I speak just for what I've seen and heard.
For this first post, let's tackle the most fundamental truth that is almost non-existent in the client-advisor conversation – financial advisors are paid to sell, not to think. This bears repeating – financial advising firms pay their advisors to sell…not…to…think.
You may be thinking that I'm making some gross generalization, but I pull this line from direct experience. Throughout 2008, I was informed exactly five times by various levels of management in the large firm I worked for that they "don't pay us to think, they pay us to sell," in questioning the "everything will be fine" party line (as the markets continued to tumble
. When you hear an exact phrase more than a couple times, can't you officially call it a conspiracy?
So here's just one implication of this philosophy, an implication that I believe is at the heart of why the traditional financial advising industry is insufficient to meet the needs of a new generative economy
If advisors are not paid to think, then who is?
This is what happens to your money when you hand it to an advisor – if you're like any of the 80 million other Americans
whose advisors put their money into mutual funds. The advisor read the glossy sales materials for the funds, maybe they pulled a Morningstar Report
and saw how many stars it has, what its performance has been and maybe what the top 10 holdings were in the fund. That's probably where your advisor's research stopped.
When your money was sent to the mutual fund company, they handed it over to a management team who is managing maybe $2 billion other dollars along with your $10,000. They split up the research among their team, so that each person is researching only specific types of businesses like transportation or consumer goods.
The board of directors for the fund also oversees 120 other funds
, maybe even 170 other funds. They have to read an annual report larger than War and Peace
on each fund, along with quarterly reports about its performance. How likely do you think it is that they're reading all this material?
Meanwhile the people that oversee the team of analysts, the investment advisors, are often paid based on performance and the board of directors hardly ever replace them (they are the ones with the power to do so). There is a built-in incentive for the advisors and their team to take on risk. Hence the multitudes of funds that had (and still have) mortgage backed securities, credit default swaps, and other such nasty things in their portfolios.
So if your financial advisor isn't watching your money, and the board of directors isn't watching your money, and the analysts are only watching their industry stocks, and the investment advisors are looking for the highest returns to keep money in the fund, then who is really watching your money? Is anyone watching your money?