Monday, April 23, 2012

"Financial Advisors:" legit professionals or snake oil salemen? Part I

What is the value provided by a financial advisor?  Do they really know how to manage your money better than you can, or are they just slimy, shaky, fly-by-night snake oil salesmen? 

Indeed, what kind of bang does the consumer of financial advice get for their buck? Some question the value consumers gain in doing business with financial professionals, while others ponder the nature of the commissions and fees withheld by these professionals for their services provided and how these commissions and fees are connected to the underlying motivation financial advisors have in offering the sales of various securities and insurance products to trusting consumers. Exactly what does the consumer gain in the long run from using the services of a financial advisor?

Truth be known, people who use these charlatans are worse off in the long run.

Overall, a financial advisor functions within an industry that is regulated by FINRA, and to a lesser extent the federal government via the SEC, and by the individual states regarding insurance products and services. Anyone offering advice, sales of securities or financial or insurance related products needs to possess a valid license from each authority to legally transact business within the industry. The purpose of these licensure requirements rises from the many and varied past abuses of the public trust by charlatans and rapscallions posing as ‘advisors,’ offering nebulous products that on the surface sounded good as described by these slick hucksters, but in reality provided little if any actual value in exchange for the hapless consumer’s hard earned cash. Have things changed all that much from those days to what we see within the financial services industry now, given that the industry is reigned in to some extent by extensive regulation?

Not really.

Regarding the credibility of each advisor, what exactly do they know about the future and how this will affect your financial position? The answer: absolutely nothing. Nobody has a crystal ball, and the fact that they predict likely performance based on what happened in the past with each instrument they hawk is always disclosed by their catch all (and mandatory) phrase: ‘past performance is not a guarantee of future results.’ In other words, they are flat out guessing about how your portfolio will look going forward given the general history of the products and services they sell you, when in reality they have no more information about what will happen in the future to the value of the products they shill than anybody else.

What exactly do financial advisors know that you don’t know when it comes to how a security will perform in the future? Again, nothing. One advisor (a Certified Financial Planner, or CFP)  emailed me the following: ‘…you may want to increase your international exposure. Inflation is coming and the value of our dollar will fall, which is good for international. The government printed up so much money to stimulate our economy that inflation is bound to happen. Also, I know you don’t want bonds, but you may be able to get stock like returns from International bonds in the future. Do this in your IRA or annuity though. International bonds spin off phantom income which accountants don’t like.’ Sounds like this guy knows his economic theory, doesn’t it? Is this CFP a credentialed economist? 

No. Although there are a few FA’s that have formal educations in finance and economics, most FA’s are not financial experts or economists, and have no real education in economic theory. This guy likely just read some financial journal article in which the esteemed author opines that rampant and out of control inflation is inevitable. Accordingly, this FA positions this opinion as the bogeyman to be defeated by his international bond proposal. In truth, this ‘Certified Financial Planner’ has absolutely no clue whether our dollar will rise or fall or whether rampant inflation will occur in the future, because no one knows for sure.  This 'advice' from the aforementioned CFP was given to me in June of 2009.  Had I taken his advice and bet the farm on international bonds nearly three years ago, I would be walking around with a barrell and suspenders, I'd be dead broke, just like Jon Corzine of MF Global who bought into this international bond snake oil sale, and bet his farm (and everybody else's at MF Global) on it.  International bonds, particularly European based bonds are almost worthless now, and they are so risky their yield is through the roof to entice some stupid schmuck to buy them.  And nobody is touching them right now with a 10 foot pole.   

This particular CFP based his sales pitch back then on a singular economic opinion. Unfortunately, the field of economics is not called the ‘dismal science’ for nothing: much of the science of economics is dedicated to economic theory which is far more subjective than objective. Because the real world application of these economic theories by politicians currently in power rarely produce exact results on any nation’s actual economic activity, the old saying certainly rings true: ‘if you lay all of the economists in the world end to end, they would never reach a conclusion.’ Or this one: ‘economists have accurately predicted nine of the last five recessions.’ And certainly one of my favorite economist jokes goes something like this:

Q: What's the difference between an economist and a befuddled old man with
Alzheimer's Disease? A: The economist is the one with the calculator.

"Financial Planners:" pros or snake oil salesmen? Part II is forthcoming....stay tuned.



8 comments:

Silverfiddle said...

I've never used one, and I've never thought much about the topic until now.

I do recall that when I was getting out of the service, more than one financial advisor company approached me offering me an employment opportunity.

I have no financial background, which tells me they are just salespeople selling packaged crap the company tells them to sell.

Fredd said...

Silver:

That's right. You need not even graduate from high school, as long as you can schmooze, you're in.

It's not a profession, it's a racket.

Z said...

I think some FA's are good to have on your side and that some are educated, but you're probably right...who's to say and how do we know?

I think of FA and think of Geithner; shudder. He's got his hands on ALL of our money!
Let's just put it this way...I doubt he does hold a calculator!

Fredd said...

Z:

We would all like to think that there are good FA's out there, but it's just not reality.

And I say this because: when your portfolio goes up in value, your FA makes money. When your portfolio goes down in value, your FA makes money.

Much like a bookie. Just get rid of them, they are parasites sucking off of your assets.

Michaelene said...

Dear American liberals, leftists, social progressives, socialists, Marxists and Obama supporters, and other meatheads et al: We have stuck together since the late 1950's for the sake of the kids, but the whole of this latest election process has made me realize that I want a divorce. I know we tolerated each other for many years for the sake of future generations, but sadly, this relationship has clearly run its course.

Our two ideological sides of America cannot and will not ever agree on what is right for us all, so let's just end it on friendly terms. We can smile and chalk it up to irreconcilable differences and go our own way.
Here is a model separation agreement:
Our two groups can equitably divide up the country by landmass each taking a similar portion. That will be the difficult part, but I am sure our two sides can come to a friendly agreement. After that, it should be relatively easy! Our respective representatives can effortlessly divide other assets since both sides have such distinct and disparate tastes.
We don't like redistributive taxes so you can keep them.
You are welcome to the liberal judges and the ACLU.--Since you hate guns and we'll take our firearms, the cops, the NRA and the military.
We'll take the nasty, smelly oil industry and you can go with wind, solar and biodiesel.
You can keep Oprah, Michael Moore and Rosie O'Donnell. You are, however, responsible for finding a bio-diesel vehicle big enough to move all three of them.
We'll keep capitalism, greedy corporations, pharmaceutical companies, Wal-Mart and Wall Street.
You can have your beloved lifelong welfare dwellers, food stamps, homeless, homeboys, hippies, protests, druggies and illegal aliens.
We'll keep the hot Alaskan hockey moms, greedy CEO's and rednecks.
We'll keep the Bibles and give you NBC and Hollywood
You can make nice with Iran and Palestine and we'll retain the right to invade and hammer places that threaten us.
You can have the peaceniks and war protesters, occupiers,letter writers, boy-cotters,etc. And when our allies or our way of life are under assault, we'll help provide them security.
We'll keep our Judeo-Christian values.
You are welcome to Islam, Scientology, Humanism, political correctness, Jane Fonda,Rosie O'Donnell, Barbara Streisand, Bill Maher, Michael Moore,
Sean Penn, and Shirley McClain. You can also have the U.N. but we will no longer be paying the bill.
We'll keep the SUV's, pickup trucks and over-sized luxury cars. You can take every Volt and Leaf you can find.
You can give everyone healthcare, Obamacare and all the taxing that goes with it if you can find any practicing doctors.
We'll continue to believe healthcare is a luxury and not a right.--We'll keep "The Battle Hymn of the Republic" and "The National Anthem."
I'm sure you'll be happy to substitute "Imagine", "I'd Like to Teach the World to Sing", "Kum Ba Ya" or "We Are the World".
We'll practice trickle-down economics and you can continue to give trickle up poverty your best shot.
Since it often so offends you, we'll keep our history, our name and our flag.
Would you agree to this? If so, please pass it along to other like-minded liberal and conservative patriots and if you do not agree, just hit delete.
Thank you and Good-bye.

Z said...

MY ASSETS? Do you know something I don't know!? they won't get far :-)

Financial Advisor Jacksonville said...

Cheers for a very good post. You have given me satisfaction to every post i read here. Hope you keep on sharing relevant information to all your readers.

Stephen Watts said...

financial advisors houston are of great advantage in any situation there may be. You can be assured of your family’s future and be capable enough to give them the opportunity to live a happy life away from financial stress. With the life insurance that you can get from Oak Harvest Financial Group, their future will be settled the way you want it to be. You can make necessary changes if you want to and feel free to ask your advisors because they are very willing to give you a helping hand at all times.