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!)
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, or in other similar ways. They 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.) Commonly, even after you’ve figured out that you’ve been hoodwinked, getting out of the product doesn’t help much because most of the damage has already been done to you.
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 evil 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. I think they tend to fleece wealthier folks through high investment management fees, but I suspect they also use commissions too to juice their egregious takings.
Instead, manage your own money with the only two investments you need instead. If you need help, read this blog and DIY if you have the time, acumen and energy, or reach out to a fee-only (= no commissions!) financial advisor like me, or these guys. I recommend paying only for one-time financial planning or incidental on-going advice, but NOT for as advisor to manage your assets via Assets Under Management (AUM) fees.
If you really think you need ongoing investment management services AND the fee is well under 1%, you could consider it. Vanguard charges 0.3% AUM for this service, which is reasonable, but I still think you’re better off keeping that 0.3% and doing it yourself.
Instead, ask your fee-only advisor for their investment recommendations and implement them yourself, or better yet, 98% of you can probably go with my ‘two investments’ guidance and be done with it (and the other 2% would still do fine if they took the same advice.)
How to identify the 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, or how shiny his shoes are!) If the answer is ‘yes’ to any of these questions, grip your wallet tighly and run the other way:
- 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.
- Are they recommending an annuity? Annuities, like cash value life insurance, are notoriously high-fee and inflexible. AVOID!
- Do the mutual funds they recommend take any ‘front loads’ (upfront fees)? If so, RUN! Good mutual funds generally have no loads, back or front, and very low annual expense ratios (under 0.5%; Vanguard’s core index funds average around 0.1%.)
- Are they recommending any 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
suckersinvestors in the dust.
- Are they offering to ‘manage’ your money by buying and selling individual stocks? Very few people can beat the market, and no one that can is going to spend much time tracking you down, because they’ll be too busy making money hand-over-fist to let you in on their secrets.
- 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, and illiquidity.
- Are they selling timeshares, or real estate as an ‘investment’? 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.
There you go. Avoid these guys selling these products and you will make me very happy and make yourself much richer. I hate seeing people who should have so much more money than they currently do because they’ve fallen victim to the folks above. And, sadly, many people I see have, including many of my clients, friends, and family members. That puts the personal in personal finance, let me tell you!
Don’t be one of the bad guys’ victims, and if you have been, fix the situation by getting your money away from them and out of whatever bad product it’s been put into as carefully and costlessly as you can. I can help if you need it.
To financial service professionals employed by one of these firms
I should note too that this isn’t a dig at any particular person working at these companies. If you’re one of them, I’m sure you believe and 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, often with the perpetrators not even realizing that they are doing something bad for their clients, or rationalizing it away. “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!”
All of these are lies you tell yourself to feel better about hurting people because it’s good for your bottom line.
To you I make this plea: If you’re a financial services provider working at one these companies, 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 the way I do in case you’re interested in leaving the Dark Side of personal finance.