I read an interesting article in the Tycoon Report yesterday … one that I would normally gloss over because it was not their usual meaty, financial “how to” type of article, but it said:
By now must know where I stand on capitalism. I told you then and I will tell you again that unfettered capitalism is NOT a good thing … the problem with capitalism is that, by design, it rewards deviant behavior.
For example, let’s say that you are a conventional doctor with his/her own practice and you take insurance. You get rewarded based on how many patients you see, how many drugs you prescribe, and how many procedures (e.g. surgeries) that you do.
Does this make sense to you?
Wouldn’t it be better if the doctor were compensated based on how healthy you were? Or if he got you to stop smoking or to exercise more? In other words, shouldn’t he be compensated based on making you healthier or keeping you from being unhealthy? Shouldn’t both of your interests be aligned so that there is no conflict?
An extremist view perhaps, but it was ‘food for thought’ and actually reminded me of something that Warren Buffett said … so I went through my files and dug it up!
In his 2006 letter to shareholders, Warren Buffett was scathing of what he calls “helpers”, that is stockbrokers, investment managers, financial planners and so on”
A record portion of the earnings that would go in their entirety to owners, if they all just stayed in their rocking chairs, is now going to a swelling army of helpers.
Of all places, this was first picked up as a major issue in Australia, because one of Buffett’s targets was the financial planning industry, which has been under the spotlight down-under, resulting in major new controlling legislation for this ‘industry’.
Helen Dent, a director of the Australian Shareholders’ Association, says that she “personally” agrees with Buffett’s scepticism of financial advisers:
Look, let’s face it, most people when they start thinking about investing, they ask their friends and they ask their neighbours and workmates what they’re doing before they get anywhere near an adviser.
The commissions that are paid to financial advisers, that you actually pay, is effectively coming from the producers of the financial products. That’s, on the whole, where the financial advisers are getting the bulk of their income from.
Most financial advisers are tied to financial institutions. That means that the range of products that they suggest to you is often bounded by what the financial institution says they can offer. It’s not bounded by what’s in your best interests.
So, what do you think?
This is an interesting article. I often discuss with my family and some friends different financial vehicles and strategies, a topic too often shunned from conversations. Other topics even more important (for those less educated in the ways of money) such as debt, credit cards, home equity, and regular saving, are also not popular to talk about. The more we know, the better off we are.
Yet a few days ago, I asked a “friend” about a particular strategy he uses and he told me “Unfortunately, I am not qualified to provide direct financial advice, so I tend to talk about principles rather than specifics on this blog.” And he then subsequently referred me to a financial adviser.
@ Chris – I am not saying that you shouldn’t seek financial advice … quite the opposite. It’s just a question of who/where you get the advice from … stay tuned for a follow-up post addressing that very question,
Your Friend (no quotes required), AJC 🙂
There are many advisers out there who operate on a fee only basis, and thus make no money from larger financial institutions; but even those advisers are not worth the minimum 1% AUM that most charge.
The primary reason why financial advisers provide little value to most individuals is because advisers are typically paid based on how many products they sell or what level of assets they have under management. This means that their income is never to determined by whether they can decipher where the market is going or what stocks are going to do well. Of course this means that their focus leans toward increasing sales or AUM.
Because of this the main value they provide is to help a client diversify his or her assets among different asset classes, but this type of research can easily be done by anyone with an interest in their own future and thus renders any financial adviser obsolete.
Just an opinion.
@ Andrew – you make the point about a 1% differential … to which you must add the 1%+ charged (as deducted from your deposits and or returns) by the funds he most-likely recommends; that comes out of YOUR pocket and is a lot to make up … Warren Buffett would say it’s an impossible chasm and I would agree.
@AJC No doubt there are more fees in mutual funds or etfs beyond the AUM fee charged by any adviser. I also agree with your and Warrens assertion that it is near impossible to achieve any reasonable return after such fees; I was simply making the point that there are independent advisers out there who do not profit from such mutual fund and etf fees.
That being said I would never delegate my financial planning to anyone else.
@ Andrew – we can agree to agree 🙂 It’s how WE profit that really counts. Thanks for your comments!
I thought Buffett was mainly targeting hedge fund managers and private equity managers who take 2 & 20. The bottom line is that some of these guys are worth paying high fees to but many and maybe the majority are not.
@ Moom – Buffett holds the hedge fund guys up as the pinnacle of ‘helpers’, but not just … actually, some of my best friends are hedge fund guys. Not ‘investing’, though …
BTW: I’m doing a f/u post on the impact of the sorts of ‘ordinary fees’ charged on portfolio returns … it’s scary what even 1% can do.
Middlemen are less and less useful/helpful as information to consumers increases. Real estate agents and stockbrokers, for instance, used to have access to all kinds of information that the average joe simply couldn’t get. Therefore the average joe paid high fees and commissions to those intermediaries.
Not so today. People can now access information on the cost and value of goods and services from a variety of providers. This increases competition which drives down prices. People can now invest via discount brokerages for less than $10 a trade – a fraction of the previous generation’s prices. People can sell their homes without paying a realtor 6%, saving tens of thousands of dollars. Eventually intermediaries will not be needed at all in some industries (like how you can now get insurance directly from insurers without going through an expensive broker).
@ Meg – agree on trades … I am using a broker on a UK stock deal – horrible experience; and Scottrade for US trades – bloody marvelous, by comparison (and, at $7 a trade!).
Have to disagree on realtor … acting for yourself, is having a fool for a client 😉 Also, even the type of detailed info that you can get on the MLS (e.g. on multi-unit residential) is much better for brokers than for the public … but, I’m open if you have sources that I haven’t seen?
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