John Oliver had a wonderful segment last night about the deceptive and damaging practices of some financial advisors and financial firms. I’ve spent much of my career with a front row seat at this table having started in the insurance business, then moving on to the largest stock brokerage firm, managing a small private partnership and finally starting a low fee advisory and asset management firm. You could say that my career has been a series of mistakes/lessons all leading to where I am today where I am finally offering a service that I feel is truly in the best interests of the client. So I have a bit of knowledge on the flaws in this industry because I’ve seen the belly of the beast from so many different angles. And John Oliver just absolutely nails it in this segment. If you work with a financial advisor or have money in a retirement plan it’s worth reviewing the video and some of the warning signs that could be hurting your chances of retiring rich:
- Beware of advisors and firms who are incentivized not to work in your best interests. The most obvious incentive is the payment structure your advisor or firm uses. For instance, a commission structure could incentivize the manager to trade excessively thereby churning fees and taxes without actually adding any benefit. Another common problem is a product conflict in which the advisor sells a high fee product when there’s a low fee alternative because they get paid more to sell the higher fee product. Always ask your financial advisor how they get paid and if they’re using the lowest priced products available.
- Beware of the fees in your retirement plans. 401Ks are a gold mine for financial advisory firms. Where you can, use the lowest fee funds possible in these accounts. And always consider rolling over a 401K into an IRA when you can. The increased flexibility will often help you reduce fees significantly by giving you broader options. My general rule is that no one should pay more than 0.5% per year for financial advice. The 1% fees we consistently see have become antiquated and do more harm than good.
- Beware of false promises about “beating the market”. Strategies that sell “alpha” and “excess return” have been proven, resoundingly, to fail over time. Most portfolio managers sell the HOPE of excess return in exchange for the GUARANTEE of higher fees and higher taxes. If someone is selling a market beating strategy they’re not only selling you something that is not a financial goal of yours, but they’re usually trying to justify higher fees when we know that comparable index fund strategies do better. Ask your portfolio manager or advisor if their goal is to beat the market. If they say yes then you probably aren’t working with someone who has your best interests in mind.
- Beware of high fee advisors using index funds. It’s become very popular these days to promote a portfolio strategy as “passive low fee indexing”. But you have to look under the hood of this approach. I’ve highlighted over the years how many “passive index funds” are actually active funds charging high fees. Further, many advisors lop on their 1% fee inside of a passive indexing strategy. Paying 1% or more for a passive indexing strategy defeats the whole purpose of using the index funds in the first place because you end up paying high fees in the end via the management fee instead of paying the fees inside the active funds!
The whole segment is not only hilarious, but educational. You can watch it below. It will be a worthwhile 20 minute investment:
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.