How to avoid money management companies that want to sucker you

My conservative SWAG is that ~95% of the financial ‘services’ being provided to your average investor are legalized theft, and actively doing harm to consumers as opposed to helping them retire, send their kids to college, live within their means, etc. As an (independent, commission-free) person in the financial services industry, let me be the first to tell you that you should be extremely skeptical and selective about whom you go to for investment advice, insurance, and investment services & products.

Trust no one. Except me; I’m one of the few good guys (but test me anyway just to show you’re paying attention!)

There is really only one investment firm I recommend to keep your investments at, and that’s Vanguard, because of the unique way the company is structured.

However, there are TONS of firms I hate, and I’m happy to tell you by name whom they are. I already talked about sh***y banks, so let’s turn to financial ‘services’ firms aka money managers. The MO of all of these firms is straightforward and, in my opinion, should be criminalized because of the billions in harm they do to consumers each year:

They spend a lot on salespeople and advertising and get you to invest with them in the guise of looking out for your interests, and then…

… they sell you high-commission-generating or otherwise high-fee products that secretly steal your money without you really being aware of it. This can happen through commissions that they get but you don’t directly pay, through high expense ratio mutual funds that you pay straight from your account balance without noticing, AUM fees– 1% sounds small but eats up ~15-20% of your future wealth— or in other similar ways. They sometimes compound the evil by getting all their money up front through high ‘sales loads’ or commissions at the time of sale (vs annually in an expense ratio or annual fee, although they do that too, the bastards.)

You end up MUCH MUCH poorer because of all the fees being siphoned off, and these guys laugh all the way to the bank, with the lower-level grunts maybe not even realizing what an evil they’re perpetrating. Read the anecdote about “the customers yachts“.

The firms in the money management space that I see most frequently taking advantage of average investors are:

Ameriprise: they sell you expensive, illiquid products like cash value life insurance and non-tradable REITs and get exorbitant kick-backs– politely called ‘revenue sharing’ or just ‘commissions’– from the folks who’s high-fee products they sell you (or they cut out the middleman and sell you their own high-fee products.) When you try to get out of these products, you find you’ve already paid a huge upfront commission, might have MORE fees to pay for the privilege of taking your own money back, and/or would have to sell at a big loss in a secondary market (*cough* time shares and non-traded REITs!)

Ameriprise has paid up at least twice in multimillion-dollar class-action lawsuits, which is amazing considering how much leeway they already have to legally steal from people. But hey, when you’re greedy and shady and have investors to please, why stop at just the legal ways of separating investors from their hard-earned money?

Edward Jones: same thing as Ameriprise, but often with high-fee mutual funds that they get their kick-backs from.

Raymond James: same business model as the other two scoundrels.

I don’t see UBS, Merril Lynch, Bank of America, Wells Fargo and the other big ‘wealth management’ guys picking on the small investors as much, but avoid them too. They tend to fleece wealthier folks through high investment management fees. I bet they also use commissions to juice their takings.

Get help from a flat fee-only investment manager like me instead.

How to identify other bad guys

The above wasn’t an exhaustive list of the bad guys– like bacteria, they are too numerous to count,– so here’s a few helpful tips for deciding whether the financial person you’re dealing with is going to rip you off. (I don’t care how neatly pressed his suit is, how well it fits, how high up the office is, or how shiny his shoes are!) If the answer is ‘yes’ to any of these questions, grip your wallet tightly and run the other way:

1. Are they recommending cash value/whole/universal/variable life insurance to you? If you ever hear the word life insurance in a sales context, unless it’s immediately preceded by the word ‘term’, you know the person is a scoundrel.
2. Are they recommending an annuity? Annuities, like cash value life insurance, are notoriously high-fee and inflexible. AVOID!
3. Do the mutual funds they recommend take any ‘front loads’ (upfront fees) of ‘back loads’ (exit fees)? If so, RUN!
4. Are they recommending mutual funds with expense ratios > 0.5%? Don’t pay a guy in a suit to underperform the market. Get the market return using a low-fee index fund and leave those other suckers investors in the dust.
5. Are they offering to ‘manage’ your money for a 1+% of AUM– which is ~15-20% of your expected real investment returns– by buying and selling individual stocks or mutual funds? Very mortals can expect to beat the market over any length of time. Anyone that can won’t be reaching out to you because they’ll be too busy making money hand over fist.
6. Are they selling any product that sounds sexy or complicated like REITs, private equity, oil and gas partnerships, some hot new industry/sector of the market, stock or IPO that you should get in on? You don’t need any of that complicating garbage. It’ll only hurt you on average with fees, taxes, risk of permanent loss, and illiquidity.
7. Are they selling timeshares or recommending rental real estate? Real estate, and timeshares specifically, have super high fees and liquidity problems. Let your personal residence be the extent of your real estate ‘portfolio’, and leave the rest of the real estate game to the pros. Real estate brokers get paid to sell you real estate, so ignore them when they tell you how wonderful it is (“it’s ALWAYS a good time to buy!”), and read my skepticism instead.

If you’ve already been suckered a bit or are just feeling like your current advisor isn’t doing enough to earn their keep, make the switch!

Get your money away from them and out of whatever bad product it’s been put into as carefully and costlessly as you can with the help of a fee-only advisor like me.

Addendum: An open letter to financial service professionals employed at one of these firms

This isn’t a dig at any particular person working for one of the companies mentioned above. I’m sure you try to do right by your customers, but you’re ‘paid not to understand’ how bad the incentives are at your employer and how self-serving the products you’re encouraged to sell are.

Good people + bad incentive systems = bad behavior by otherwise good people. “Well, they’d just go to some other big firm that’ll rip them off in the same way!” “But I need these commissions to live. My family’s gotta eat too!”

These are polite lies you tell yourself to feel better about hurting people because it’s good for your bottom line.

Get out of a corrupt system and make money in a more honorable way if you can. I’m happy to chat about how I decided to run my business if you’re interested in leaving the Dark Side of personal finance.