In the investment world – as in most other parts of life – there are plenty of “experts” eager to tell you what to think. Relying too much on these types can be just as bad as investing blindly, for two reasons.
First, no one – not even (or especially) so-called experts – are right all of the time, or even most of the time. Listening too much to supposed authorities is called the “seersucker illusion” – from the expression, “For every seer, there is a sucker.” (Seersucker is also a type of lightweight fabric, usually striped, popular decades ago).
People fall victim to this even though the average market “seer,” or expert, has a lousy record of predicting anything.
Second – and worse – most investment experts (or investment advisers, or private bankers, or something similar) are looking out for their own interests first. And they often do this to the disadvantage of their clients’ interests.
Investment advisers break the law in pursuit of their own interests with alarming frequency. A recent study in the U.S. looked at every broker and adviser in the database of FINRA (the U.S. regulatory organization that monitors investment companies and advisers) for the ten years ended in 2015.
It found that 7.5 percent had been guilty of some sort of “misconduct” at least once in their career. That’s about 48,000 advisers out of the 644,000 advisers currently registered with FINRA – or more than all the financial advisers in Singapore.
The most common sin was selling investment products that weren’t suitable for the customer. That might mean putting your grandmother, or maybe their own grandmother, into a high-risk growth stock, when all she’s looking for is income.
This was followed by things like “misrepresentation” and “omission of key facts.” And then the big ones, “fraud” and “unauthorized activity.”
There are a few ways to defend yourself against bad advisers. One way is to avoid them altogether, and chart your own financial future.
Another way is to arm yourself. A smart patient researches his ailment before he steps foot into the hospital – so that at least he knows what kinds of questions to ask the doctor. Similarly, if you know what to watch out for in investment advisers, you can protect yourself.
Here are three red flags that tell you to just walk away from the “seer” you’re speaking with so that you don’t become a sucker.
1. If they say any version of the following:
“We specialize in tax-efficient savings plans.”
“We offer offshore investment and insurance opportunities.”
“I work for one of the world’s largest independent financial consultancy companies [or, “offshore wealth management companies”].”
2. They try to sell you a “personal portfolio bond,” a “wrapper,” a “regular savings plan,” or a “structured product.”
These products (especially if they’re “tax efficient” and “offshore”) will be sponsored by an old, well-established insurance company. And many of them are highly profitable – for the adviser and the insurance companies that offer them.
The vast majority of investors are much better off without them, though. These are complex products that many of the people selling them don’t fully understand themselves.
3. They are evasive about fees, or can’t even explain them all.
One well-known product offered to expatriates in Asia, marketed as a savings plan, involves administration fees that would consume 11 percent of the total accumulated “savings.”
The fee structure of this and other products may be presented as 2 percent per year, but they don’t make it clear that this fee increases by two percentage points per year – so that you’re paying 20 percent for year 10. Management fees charged by investment funds themselves can also add up very quickly.
Wrappers, or personal portfolio bonds, can include more than 8 percent in “initial” set-up fees, plus ongoing administration fees and investment fund fees.
When you have to pay all of these fees just to hold money in an investment product, it’s very hard to make money. And the fees offset any potential tax savings the products are supposed to offer.
The average investor would be much better off opening an online trading account and owning a basket of exchange traded funds (ETF). It will cost you less and you’ll probably get better performance.
So, don’t be a sucker. There is a role for financial advisers for certain investors. But it’s important to do your own analytical thinking and not put too much faith in experts – especially those who are better at making money for themselves than for their customers.
Get the input of someone who doesn’t have a financial stake in your investment decision. And don’t forget to read the fine print.