Financial Advisor Scam

"I couldn't believe the BS my former advisor tried to pull when I confronted him." - Henry A.

Quotes

The Scam

"A vast industry of stockbrokers, financial planners, and investment advisers skims a fortune for themselves off the top in exchange for passing their clients' money on to people who, as a whole, cannot possibly outperform the market." - Michael Lewis, Conde Nast Portfolio, The Evolution of an Investor

"Investment managers sell for the price of a Picasso [what] routinely turns out to be paint-by-number sofa art." - Dunn, Patricia C., CEO, Barclays Global Advisors

"It is not easy to get rich in Las Vegas, at Churchill Downs or at the local Merrill Lynch office." - Samuelson, Paul A. , Massachusetts Institute of Technology, Economist, Nobel Laureate in Economics

"Santa Claus and the Easter Bunny should take a few pointers from the mutual-fund industry [and it's fund managers]. All three are trying to pull off elaborate hoaxes." - Jonathan Clements, Wall Street Journal

"Having been an idealistic young sales-oriented fellow I became a licensed stockbroker for one of Wall Street's most prestigious firms in the late 60s. I learned very quickly that to succeed I had to "sell my soul", and to be more than moderately successful I had to follow the boss' program and to sell exactly what the boss wants sold - - it was "the hell with the client". ... kudos for having the intestinal fortitude at PORTFOLIO [magazine] to speak out about the 'sacred cows' that graze along Wall Street!" - Peter Magurean III

"... certain aspects of our relationship with the fund families in the Program may create conflicts of interest or incentives for Ameriprise Financial to promote, and for an advisor to recommend, a fund from a family that participates in the Program over a fund from a family that does not participate in the Program. In addition, among fund families participating in the Program, we generally have a greater incentive to offer funds from Full Participation Firms than funds from Limited Participation Firms. As further described below, these conflicts and incentives may arise from the marketing and sales support provided to our financial advisors by, as well as the payments we receive from, fund families participating in the Program, and our other relationships with fund families, including our affiliation with the RiverSource Investments family of funds." - Ameriprise Client Agreement

"I am a Registered Investment Advisor (RIA) with the Securities and Exchange Commission. Are you impressed? Don’t be. Just about anyone can become an investment advisor. Simply send in a form to the state or federal government with a modest filing fee, and you can join the club. You don’t need an MBA or a college diploma to apply. Heck, you could have flunked out of the third grade, gone bankrupt seven times, lost everything you ever owned to a Ponzi scheme, and still make a great living managing

other people’s money.

In this surreal world of investment advice anyone can claim to be an expert and get paid for it. This is why most stockbrokers, financial planners, and insurance agents are in the business, and why accountants, attorneys, and bankers want in as well. The problem is, most investment advisors are borderline incompetent. Thousands of them lack the basic investment skills and knowledge of a first-year business student." - Rick Ferri

"The investment advice and management industry is built on fraud: the idea that professional advisors can predictably and consistently help you get a better return on your investments. The industry sells us on this lie using manipulative tactics that are studies, refined, Wall-Street minted and Madison Avenue packaged." - The Big Investment Lie: What Your Financial Advisor Doesn't Want You to Know

The 'financial advice' industry, with very few exceptions, is a scam. In order to keep their jobs and make money for themselves and their firms, 'financial advisors' must charge their clients a lot of money ... and over time that will badly hurt the client. The very people that are supposed to be helping you reach your dreams are destroying your dreams with their high fees. In fact, 95% of 'financial advisors' are really brokers working for brokerage firms and banks, not you.

Some financial advisors have good intentions and some don't. But intentions don't matter when we are talking about your financial future. Your money is what matters. And know that the greater your trust in your financial advisor, the greater the chance that you are being hurt financially. Even if your 'financial advisor' is a friend or family member.

Consider that the safe withdrawal rate in retirement is considered to be about 4%. (This is what you can safely withdraw from your investments and not run out of money before you die). It's typical for clients to pay 2 - 3% of their investments in wrap, commission and fund fees. What does that leave the retiree? Not much.

Let's look at the impact of fees, over time, on your nestegg. The table below (used by FINRA/NASD to educate investors) assumes you invest $2,000 on January 1st of each year and earn a 10% rate of return before deducting fees.

The Balance after 5 Years 10 Years 20 Years 30 Years 40 Years

Mgmt. Fee @ 0.02% $13,423 $35,022 $125,696 $360,454 $968,249

Mgmt. Fee @ 0.25% $13,334 $34,556 $122,204 $344,402 $907,762

Mgmt. Fee @ 0.50% $13,238 $34,077 $118,528 $327,816 $846,479

Mgmt. Fee @ 1.00% $13,047 $33,121 $111,529 $297,150 $736,584

Mgmt. Fee @ 2.00% $12,672 $31,291 $98,846 $244,692 $559,562

Mgmt. Fee @ 3.00% $12,307 $29,567 $87,730 $202,146 $427,219

Think about the numbers on this table. It is common for people to be paying

2, 3 and even 4% in combined mutual fund and advising costs. If your investments are costing 3.00%, your nestegg will be some $541,000 lower after 40 years than if you used low-fee investments and did your own investing. How many years of retirement is that? Shouldn't a Financial ADVISOR be showing his clients this chart? But they do not. Did yours?

"Financial Advisors" (95% are really brokers: product salesmen) are costing investors horrible amounts of money. But do they get higher returns to make those horrible costs worth it? No. Studies show that people using financial advisors receive much lower returns than those not using financial advisors.

"... the BCT study found that the raw returns of equally weighted mutual funds (net of all expenses) for 1996 to 2002 were 6.626% for the investors working on their own and were 2.924% for funds provided by advisors." - Daniel Moine, Research Scientist

Why are you paying those high fees? To be manipulated, receive poor advice and lose years of retirement.

Part of the scam is financial advisors selling clients high priced, actively managed funds when they should be putting clients into low-cost index funds:

"Looking at longer time periods, indices continue to exceed a majority

of active funds. Over the past three years (and five years), the S&P 500

has outperformed 65.7% (72.2%) of large-cap funds, the S&P MidCap 400 has beaten 68.6% (77.4%) of mid-cap funds, and the S&P SmallCap 600 has outpaced 80.2% (77.7%) of small-cap funds." - S & P 500 SPIVA Data

And the picture only gets bleaker for actively managed funds over time. If salesmen do sell index funds, they charge a high wrap fee to negate the benefits.

Additionally:

"Investors who buy index mutual funds through brokers are paying a steep “broker penalty” by being sold funds with much higher operating expense fees even before adding the distribution fees related to the cost of using the broker, according to a major new study by the Zero Alpha Group (ZAG) and Fund Democracy. The bottom line for investors: The extra operating costs paid over time for broker-sold load index funds are triple those paid by investors in true no-load mutual funds." - Zero Alpha Group

Sadly, clients have no idea what they pay in fees and many think they pay no fees at all. The money comes right out of their investments with no full accounting, so they are not writing a check every month. Even if the client looks at the loads (or wrap fee) and expense ratio, there are other fees, like turnover within the fund, that is not in the expense ratio and is about impossible to figure out:

"The study finds that 43 percent of the funds’ expenses are omitted from their expense ratios and that the transaction costs of some funds exceed 400 percent of their expense ratios." - Zero Alpha Group

And, if you don't understand the impact of fees over time, 2% or 3% of your assets may not seem like much. The chart above proves otherwise.

If you have ever heard that a 'financial advisor' is a fiduciary and works in your best interest, consider this: " Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest."

But read on: "Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement."

They shouldn't tell clients that they always do what is best for the client when they really DO have conflicts of interest with the client that they must disclose, but only in the fine print.

The above is the tip of the iceburg, but should give you a basic idea about how the industry works. 'Financial Advisors' are usually selling products, have little or no proper investment education, do have many conflicts of interest with their clients, charge high fees and get poor returns, manipulate and outright lie to their clients and are unable to predict the future any better than you can - which is not at all. So, you are paying high fees to a salesman and fund managers who will help you lose potentially hundreds of thousands of dollars over time.

A good financial advisor would sell only advice, not products. 95% of 'financial advisors' take commissions. Many pretend that fee BASED means fee ONLY. It doesn't. A good financial advisor would know what they were doing. Most don't.

The 3% that sell only advice and have a proper knowledge of investing...well, how does an ignorant investor find one of these? Referrals are a joke since the person referring you likely has no idea what they are paying in fees or how their investments are being handled.

And here's the biggest secret of all: You can dump all these high fees and with a small amount of effort you can do your own investing. Or, hire someone by the hour.