Ten years ago Paladin Research surveys showed 62% of investors selected financial advisors from brand name firms. They said they felt safer because the firms were big and well known. Today, that number is down to 18%.
What do these investors know that you may not know?
1. Billion Dollar Fines
Wall Street firms have used deceptive sales tactics to sell products that make them the most money for decades. Most of the big firms ended up paying billions of dollars of fines for financial scams that ripped off investors. The executives who made the decisions did not suffer any consequences, their shareholders sure did. These executives, who made the decisions to cheat investors, are still running the firms that paid the fines for them.
This is the number one reason why fewer investors trust Wall Street advisors. Executives who have a history of cheating investors control the firms and the advisors.
2. Layers of Expense
The more money Wall Street can extract from your assets the more money advisors make and the bigger the bonuses for key executives. The Wall Street strategy is not to extract one big fee. That would be too noticeable. Instead, it deducts several layers of fees from your accounts. The three biggest expenses are financial advisors, money managers, and the Wall Street firm that acts as custodian.
Make sure you know exactly what you are paying and what you receive in return for the expense. Compare multiple advisors and firms to each other.
3. The Big Lie
Wall Street advisors have to make big promises about performance to offset the big fees. You may have noticed Ponzi schemes and other scams always promise high returns. You are not supposed to be concerned about fees that are 3% of the market value of your assets if your performance expectation is 20%. What if the advisor fails to deliver 20%?
Big promises are illegal. No one can accurately predict the future performance of the securities markets. That doesn’t stop aggressive salesmen making big performance claims in their sales pitches. They get away with it because the information is verbal — you have no written record of what was said to you.
4. Conflicts of Interest
Naïve investors believe the Wall Street ads they see on television. The ads promise superior results, based on exceptional knowledge, but don’t actually state a number.
More prudent investors require facts, not advertising messages, when they make decisions. But, getting to the facts is tough when Wall Street controls the information. For example, you may not know:
- Wall Street sends hundreds of millions of dollars to politicians each year to make sure industry rules favor firms and not investors
- Wall Street makes sure there are no mandatory disclosure requirements for financial advisors
- You have to ask the right questions and you have to know good answers from bad ones
The TV ads say you can trust Wall Street. If that is true why does it withhold information from you?
5. Proprietary Products
Big Wall Street firms produce their own investment products: Mutual funds, hedge funds, etc. They make more money when their advisors sell company products. They make less money when their advisors sell third party products. There is a lot of pressure to sell products manufactured by the companies that employ the advisors.
This may not sound onerous until you realize the company products may have inferior track records with higher expense ratios and greater exposure to the risk of large losses.
There is a simple solution that protects your interests. Do not buy proprietary products. You want unrestricted choices when you invest your assets in the securities markets. Select products that are produced by third parties that are not owned by Wall Street firms.
Jack Waymire is a member of the DailyWorth Connect program. Read more about the program here.