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Buy and Hold - Conflict of Interest Advice

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June 25, 2009 – Comments (7)

There is not question when I look at the garbage and commissions my financial advisors got, well, they were in an enormous conflict of interest.  The only thing I have left from my last advisor is down over 30% and I have been locked in for 8 years.  I later found out this "investment" had a commission about double the average commission.

Mish has an excellent post on buy and sell and cost averaging, which is what most people do.   He found that you actually did better in CDs going back 50 years and only .2% better going back to the start of the S&P.

If you looked at this buy and hold advice for people in my age group, it has been a disaster for most.  Certainly my own earlier experience was a disaster. 

How can you trust the advice of an advisor if they do not get paid if you sit on cash?  

One of my experiences when I worked in banks I found utterly disgusting.  First we were instructed to sell as many Canada Savings Bonds as we could and we were given a whole bunch of good reasons why.  The bank collected the commissions from the sales.  A few months later we were instructed to try and get customers to cash in their bonds and go into guaranteed investment certificates.  The banks made no money with the money sitting in bonds. 

I like what Mish had to say on the subject:

Why Is Bad Advice So Common?

Clearly, stay the course is bad advice. So why is it so common? A personal anecdote might help explain things: In January of this year, an investment advisor from Wachovia Securities called me up and stated "Mish, I am sitting on millions because I see nothing I like". I told the person I did not like much either and that Sitka Pacific was heavily in cash and or hedged. His response was "Well, I do not get paid anything if my clients are sitting in cash".

I called up a rep at Merrill Lynch and he said the same thing, that reps for Merrill Lynch do not get paid if their clients are sitting in cash.

Massive Conflict of Interest

Notice the massive conflict of interest possibilities. Reps for various broker dealers have a vested interest in keeping clients 100% invested 100% of the time, even if they know it is wrong. And so it is every recession, bad advice permeates the airwaves and internet "Stay The Course".

7 Comments – Post Your Own

#1) On June 25, 2009 at 1:05 AM, checklist34 (99.73) wrote:

call stifel and ask for my advisor, who is in mensa.  Thats got to be good.  ?No matter what the political-correctness crowd wants to say about life, IQ is as close to a measure of basic mental processing power as anything anywhere.  Its not bigoted, its reasonable.

I wish to hell, as a former and future business owner, that it was legal to IQ test employees for positions where intelligence and metnal capacity matters.  

Intelligence is like quick twitch muscle, plain and simple.  You either are or are not born with teh plubming it takes to truly be first class.  Many people NOT born with the ability to truly be exceptional athletes are in good shape and talk a mean fitness game.  But they, ultimately, won't be able to run a 10.7 100M or dunk a basketball backwards or clean 300lbs.  (at least without Barroids Bonds diet).  

And so i think it is on the caps game blogs.  For reasons I've recently begun to ponder anew, bears love to present themselves as "fit", as smart, like our fitness freak with no naturla talent above... but that doens't meant hey are right or that they are smart, it just means that they are more interested in posturing than the average bull, who seems to have the basic core interest of making money.

that doesn't mean stocks won't go down tomorrow..

buy and hold isn't right.  buy market crashes and sell market peask is.  buy when the market is down XX percent, sell when its up XX percent.

in between roll treasuries and hope for an inverted yield curve.

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#2) On June 25, 2009 at 2:04 AM, StockSpreadsheet (74.73) wrote:

dwot,

That is why you should look for an advisor that gets paid based on how much your portfolio beats a benchmark, (like the S&P500), instead of getting paid by commissions.  I know I have talked to various financial advisors in the past and all of them were paid based on how many transactions they could get me to do, not by how well I did.  That is why I do my own investing without the aid of a financial advisor.  

Another option is to get a fee-for-service advisor.  They might be a little more independent and more looking out for your best interests, so they can get your repeat business.  If they are from a big firm, (especially a big Wall Street firm like Merrill), then you can probably safely assume that the only interests they are looking out for is their own pockets and those of their big institutional clients, (which you are not one of, unless you are Warren Buffett).

I also read in an article that advisors don't like you sitting in any investment for too long.  According to the article, (forget where I read it, but it was supposed to be written by an ex-Wall Street advisor), he was told by his boss that he needed to get his clients to trade more.  When told that he didn't think that was in the best interests of his clients, he was supposedly told that unless he got them to trade more, (i.e. they stayed in cash or index funds), then the SEC supposedly would not let his company bill them on their accounts, (1% of the value of their accounts per year, if I remember correctly), as the SEC figured that the clients were not getting any services from the advising company as they were not being told to trade.  (Being told to stay in cash or index funds for five years didn't count as advice, according to the article.)  So, according to that article, even if the advisor wanted to do right by their client, and not tell them to churn their account, they would then run afoul of the SEC.

It all stinks to me.

I will say that I did go to one financial advisor early in my investing career and she was not too bad.  Didn't tell me to do a lot of trading.  (I was just dollar-cost-averaging into a few funds.)  However, she did put me in some funds run by her company.  I didn't mind at first, as there were no commissions and the fees on the funds were pretty low and their performance was pretty good.  They allowed me to start small and build up a decent sized portfolio value, (without a lot of fees), so that I then had enough to open a regular brokerage account and buy a few different stocks so that I had diversity.  I totally closed the advisory account later as I wanted to consolidate all my funds under one roof, but I thought meeting that woman was a very good and valuable experience for me.  She taught me a lot and did a lot of work with me for free.  (She also consulted with my club for free, and we told her beforehand that we would not even consider buying anything from her company as we were only interested in individual stocks, but she still helped us anyway.  A very nice lady named Amy.  Just wanted to say that some financial advisors, (and some financial advisor companies), do have the best interests of their clients at heart.  I just think they are a small minority.

Craig 

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#3) On June 25, 2009 at 5:47 AM, TMFBabo (100.00) wrote:

The only form of long-term investing that makes sense to me is the one where you pay a good price for a security (under intrinsic value) and sell it when it reaches or exceeds fair value. 

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#4) On June 25, 2009 at 2:43 PM, dwot (97.03) wrote:

Craig, I did exceptionally well when I was in the market so I'd never consider an advisor again. 

I was in a position where I had a mother-in-law and husband insisting we have a financial advisor...  I wanted to put the money on the mortgage, which when we first got an advisor the mortgage was at 9%.  Right off the bat that tells you the advisor had a conflict of interest.  Mortgage interest is not tax deductible in Canada so paying down your mortgage was a no risk 9% return.

 

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#5) On June 25, 2009 at 2:50 PM, ByrneShill (75.61) wrote:

Totally agree there Deb. It is obvious that financial "advisors" (I use the term very loosely) use a single criteria when they sell you a mutual fund: their commissions.

A few years ago my mom asked me to check her financials. My conclusion is that she's lucky she has a provincial pension. Her rrsp was filled with 2%+ yearly fees mutual funds. It was my first time dealing with mutual funds, so I decided to take a look at the prospectuses. This is not funny. A Fidelity prospectus (just an example) is a 600 pages document. Comparing 2 funds of the same family is hard enough, but comparing 2 funds from different companies is next to impossible. Then there are a bazilion ways to structure fees (A,B,C,D, S1, S2, T1, T2, whatever...), and it seems no matter which one you choose, you're getting mugged in broad daylight.

 

Anyway, I really doubt any financial advisor has ever bothered to read a single one of those prospectus, let alone reading all of them to know what he's talking about. I've never met a financial "advisor" who could explain to me why buying an actively managed mutual fund might be a better strategy than buying index funds of the same type. And I've never met one who outright told me how he's being paid (('ve heard "it's free for you" quite often though, which is a blatant lie).

You remember a while ago we disagreed on the value of a house, your argument was mainly that the builder didn't bring up much to the table while the buyer brings a lifetime of savings? Well, this point is pretty much valid for financial advisors (really, we oughta start calling them mutual fund salesman...) imho. You pay them a lot of money, but they don't really bring more to the table than a 10$-a-trade broker and an index investing book borrowed for free at a local library would.

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#6) On June 25, 2009 at 3:16 PM, WHOinvestor (60.82) wrote:

checklist34,

I unforetunately am one of the few high IQ people in the world who knows they have a high IQ and who abuses it for all the wrong reasons. Getting overconfident whenever there's competition or task that needs mental power is an example of the abuse. sigh. i know i'm still trying to get rid of the habit.

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#7) On June 26, 2009 at 9:51 AM, dwot (97.03) wrote:

bryneshill, I do remember arguing that what builders were getting was out of line with what people were spending.  Certainly the housing bubble enabled everyone in that industry to have gains beyond what the rest of us were getting.  But how is that when I was in my late teens most adults in their 30s were paying off their mortgage and they had kids.  Certainly they weren't paying for their home for life, and it was double or triple the home that today's those in their 30s in Vancouver can barely manage.

One conclusion that I have made is if you force wages up through minimum wage laws these housing bubbles are less likely to happen.  Think it through, for every freaking dollar saved on wages buisness rents/property went up.  How about just giving people a fair wage.  I don't buy it at all that business can't afford it.  They are able to afford these enormous rents.  We don't see a lobby by business against paying these enormous rents like we do against paying a living wage or a fair share of property taxes.

I don't have the quote and I am not inclined to look for it right now but the leaders of the 30s had far more common sense then the leaders who have allowed minimum wages to go so far below the level of being able to support even a single person.  The quote went something like any business that doesn't pay a living wage has no business in America.  I think we are also see the problem with letting wages fall so far disposible income has declined to the point that now business has total screwed themselves in that consumers can not afford their products.  I keep thinking about this minimum wage stuff, as economist keep arguing against minimum wage, and my conclusion is that economist use data selectively and it has worked for a while, but now the decline in disposible income has caught up with the nonsense.

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