Today we interview Bobby Monks and Justin Jaffy about their book, Uninvested and understanding the pitfalls of Wall Street.
Bobby Monks calls himself a “chronic entrepreneur” and as such, understands the dirty dealings happening on Wall Street and how they effect the average investor. Justin was new to the subject of finance but a journalist who wanted to know more.
Together with a third author, Bree LaCasse, they wrote Uninvested: How Wall Street Hijacks Your Money and How to Fight Back.
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To the average person, investing seems like this complicated thing that no lay person can possibly understand. So they hand their money over to a “financial advisor.” The authors wanted to demystify investing for the average investor using simple language. They spent four years interviewing people like Barney Frank, Jack Bogle, Carl Icahn, mutual and hedge fund managers.
There are 450,000 people providing financial services in the United States and 90% of them are sales people. Just 10% are registered investment advisors. What’s wrong with that? When you go to a car dealership, 100% of the people are sales people.
The difference is that you know the person trying to sell you a car is a sales person. The standards for most of these advisers is low. They are under no obligation to put the best interests of their clients first and many of them don’t. Their priority is making money for the company they work for.
There is a lot of confusion among consumers about who is and who is not a sales person in the realm of financial advisors. Financial advice that is skewed by a conflict of interest costs investors $17 billion a year. If you were a paranoid person it might be enough to make you think the industry has been deliberately set up this way.
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The Fiduciary Standard
The fiduciary standard was established as part of the Investment Advisors Act of 1940. Investment advisors are regulated and required to put client interests above their own. Investment brokers are only held to a standard of “suitability.”
Under this standard, a broker can look at two funds which are similar but still recommend the more costly one that will also give him or her a higher commission.
Brokers are paid based on the dollar amount of assets they manage so there isn’t necessarily any incentive to recommend the best investments, just to get the highest amount of assets under management. They often still get paid even if they lose you money.
Isn’t More Expensive Better?
If one financial advisor is more expensive than the others, doesn’t that mean he or she is better, smarter, more educated? Not in this case but it’s a common fallacy. None of these people can predict the future and past experience does not indicate future experience. The more fees you pay, the less money you have. Generally, the lower the fee, the better the performance of your portfolio.
The Retirement System
Many workers used to have a defined benefit system, a pension basically, that paid a certain amount of income for life after retirement. The system went bankrupt and had to be bailed out by the government.
That system has largely been replaced by the one we have now, which relies heavily on 401k’s and IRA’s. But it’s expensive to manage a 401k and you’re paying for that. The average fee is over 2%.
That doesn’t sound like much does it, a 2% fee? Consider this; if you have $25,000 invested over 35 years with an average yield of 7% and a fee of just 1%, that will cost you $65,000. The fees are often obscured because people tend to focus on the employer match and the tax advantages.
Index Funds And Individual Stocks
The best way to increase the chances of a good return over time is to pay the lowest fees possible. The lowest fee way to invest is to buy individual stocks yourself. The advisor industry has done their best to discredit the idea that you are smart enough to choose stocks without their help.
But by doing your research, you can pick at least as well as a paid advisor. Choosing stocks by letting monkeys throw darts at company names and buying stock in the ones they hit have gotten better returns than average.
It’s important to be diverse which is why things like ETF’s are so often recommended but you can be diversified while buying individual stocks. The authors are not suggesting that ETF’s are a bad way to invest, merely suggesting ways to take the next step and make your investing experience better.
I Don’t Want To Do Research!
Yes, doing research on individual companies is not particularly interesting or exciting for most of us but how long do you spend researching a good credit card or lap top or vacuum cleaner? None of those things are terribly exciting either. You’re spending time to save a few hundred bucks but you won’t spend a little time to potentially save tens of thousands!?
Ask The Hard Questions
If you do want to use an advisor, ask them some questions;
- Are you legally required to put my interests before your own?
- What are the fees, both disclosed and undisclosed?
- Do you yourself invest in what you recommend?
- Do you still get paid if your advice loses me money?
- What is your reporting like?
- Can you articulate to me what my investments are?
- Do you vote my proxy?
- Are you a registered investment advisor?
If you want to do a little digging on your own, you can go to the Financial Industry Regulatory Authority (FINRA) website and find out if a broker or their employer have ever had a bankruptcy or criminal complaint against them.
This sounds like it should be illegal but it isn’t. A fund can pay an administrator to get on the list of choices for investors. This is known as “revenue sharing” within the industry but it’s just a kick back with a fancy name.
Mind Your Future
If you don’t bother to investigate your fees and do what you can to minimize them, it can have a great impact on your future.
Uninvested: How Wall Street Hijacks Your Money and How to Fight Back: Bobby and Justin’s book.
Univested The Book: The website where you can learn more.
LMM Community: Join the money revolution!
Featured Image Photo Credit: “Wall St.” by Esteban Chiner on Flickr