Agendas

Before accepting recommendations from anyone concerning your financial future, there is one thing you should always remember - everyone has an agenda.

Their agenda could support your objectives, or it could also be hazardous to your financial health. To protect yourself, you need to keep your eyes wide open.

In politics, the letter (R) or (D) after a representative’s name pretty-well denotes their agenda. The media is sometimes accused of displaying biases, but I believe the overriding predisposition is toward sensationalism. Every month the financial outlets tout “The Five Best Funds to Buy Now!” or some other eye-popping claim. My purpose here is to alert you to more subtle agendas at work in the financial arena. 

We all know about the insurance salesman who has a product for every occasion. You want to save for retirement? I’ve got just the life insurance product for you! You want to save for your child’s education? No problem, I’ve got just the life insurance product for you! When all you have is a hammer, every problem looks like a nail.

Hopefully, you’ve learned to steer clear of advisors who are more concerned with selling investment products than providing solutions to your problems. It can be challenging, though, when the agenda is hidden. The invitations you receive from financial service firms for fancy lunches or dinners at local restaurants don’t come without strings attached. Who do you think is paying for these lavish spreads? You might walk away having enjoyed a fine meal, but indigestion could follow if you find yourself locked into a bad annuity for 10 years or more.

Most radio shows on the weekends are nothing more than infomercials. What might pass as selfless consumer education is really just a paid advertisement by a company selling its products or services. Have you noticed how many talk show hosts promote annuities even though they are poor products for most investors?

Plenty of information is available on the topic of conflicts of interest and the need for independent fiduciary advice. In fact, the investment community is slowly moving away from the transaction-based service model. But these realities require us to be even more vigilant against new and improved ways to separate us from our money.

The term “fee-only” was trademarked by the National Association of Personal Financial Advisor (NAPFA) to demonstrate to consumers the independence of an advisor as being paid directly by the client. However, Wall Street has rendered the term virtually worthless by obfuscating the compensation issue with the misused term “fee-based,” so that most people don’t know the difference. It seems everyone is fee-based these days, no matter what they are selling!

Agendas are not always obvious. When I heard Ric Edelman on his national radio show the other day, he was talking about how money managers are “fair” because clients with larger accounts pay more than clients with smaller accounts. He reasoned that because they charge fees as a percentage of assets the interests of the advisor and the client are aligned. After all, the advisor does well only when you do well, right?

Well, not exactly. While I actually like many things he says on his show, Ric couldn’t be more wrong in this case. Let’s put aside the fact that paying a money manager 1% of your assets is expensive and unnecessary. Is it fair for a client with a $400,000 portfolio to pay $4,000 per year in fees (1% of assets), while a client with $200,000 pays $2,000 - or half as much - when the time and effort to design and manage the portfolio is identical?

Now let’s look at what happens if your managed account drops 20% during a bear market from $400,000 to $320,000. You would have lost $80,000 of net worth, while the advisor would have earned $3,200, just $800 less! Ric and I have a different view of fairness and alignment. Could his view be tainted by the fact that he runs a money management business?

This scenario reminds me of the best-seller Freakanomics, which demonstrated that real-estate agents on average keep their own house on the market longer than they recommend for a client and sell it for a higher amount. The authors make the point that agents have much more to gain and very little to lose by making a quick sale. It’s sort of a “tails we win, heads you lose” scenario, much like the asset management business.

During the go-go days of the late 90’s, and then again before the crash of 2007, many investment advisors recommended that people refinance their mortgages and take cash out to invest. Who do you think faired better – the clients or the advisors? And I hope you aren’t shocked to learn that financial analysts on television sometimes talk down a company’s stock, while simultaneously shorting the stock to make a profit if the price drops.

Not every professional has a self-serving agenda. Some advisors are just misguided, while others have inherent biases. Many times, I’ve seen a well intentioned tax accountant give bad advice in the name of reducing taxes. If you fixate on taxes, it’s sometimes hard to see the big picture.

It would be naive to believe that some attorneys, who discourage people from executing living trusts, are not influenced by the fact that they make their living settling probate estates. Conversely, I’m sure there are attorneys drafting living trusts for some people when less expensive solutions are available.

Even one of my favorite companies, Fidelity Investments, has an agenda. If you know how to work with them, Fidelity offers many great value-added services and low-cost products. At the same time, they are in business to make money and they offer many products that I would not recommend to my clients.

There are numerous examples of conflicts of interest in the financial world. Of course as the saying goes, you have to trust someone sometime. Most financial people I know are knowledgeable and well-meaning. The good ones disclose fees and potential conflicts. Unfortunately, there are often issues below the surface that color the viewpoints and recommendations of even the best advisors. Therefore, before hiring an advisor or accepting their advice, you should have some idea of these biases.

So, if everyone has an agenda, what’s mine? I’ll leave it up to you to figure out. My website contains full disclosure of my services, philosophy, methodologies and fees – and therein you will discover my agenda. That’s the only hint you are going to get.