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Somebody has to say it. The financial services industry, the very emperor of American business, has no clothes. Well, perhaps no clothes from the waist down because they gladly take the shirts off their clients’ backs every day. 

There are those who believe what Bernie Madoff pulled off over the past several decades is the greatest financial crime in the history of mankind. Technically, they are probably right because what Madoff did to unsus­pecting investors was indeed illegal. However, his crime is dwarfed by what happens every day in the financial services industry (mostly) within the complex legal boundaries of financial regulations. 

What the financial services industry does today is the equivalent of a doc­tor deliberately prescribing medicine that will in all likelihood make you sick, if not outright kill you. Simply, he makes money off of selling that type of medicine and the government looks the other way because it’s big business. It doesn’t make it right. It only makes it profitable. 

Every year American investors are bilked out of tens if not hundreds of billions of dollars paying for services that have little or no value. The only difference is that the government not only permits, but in many cases, also encourages this behavior. It is hard to imagine why our system allows this. I use the tobacco industry as an example. Even though smoking is clearly harmful to your health, the money involved is so big that no politician dares to take on the industry. On the contrary, even the supposed ardent champions of the downtrodden thrive on campaign contributions from Wall Street and its related interests.

Ten thousand baby boomers are retiring every day and will continue to do so over the next 15-20 years. Millions of them will eventually be retired and many living off of Social Security, a modest pension (if they are lucky), and their savings. In many cases, those savings and the strategy for taking money out of their accounts will be left to the whims and wiles of financial advisors. Sadly, thanks to the very industry claiming to help you make your assets last a lifetime, the majority of baby boomers will end up either dead or broke with few of them making it into their 80s and 90s with any signifi­cant assets or income beyond a Social Security or pension check. 

This is not an opinion. Unless the financial markets perform significantly better for the next 40 years than they have in the past 40 years, as you’ll see in Grand Theft Portfolio, it’s simple arithmetic. Substantial research points to the probability that you can only start withdrawing about 4-5% of your assets annually in your mid-60s, give yourself a raise equal to the cost of inflation and then expect those assets to last through the gyrations of the financial markets until you reach your early to mid-90s. 

Unknown to most investors, those analyses use pure index returns like the S&P 500 or the Dow Jones Industrial Average as the foundation of their research, not real-world investment returns. That’s great if you live in an ivory tower with no dirt, no gravity and no friction. But here in the real world we have all of those and more. This means that when you take this research and apply it to what “Pop-Pop” and “Mimi” have to do in an im­perfect universe, you must include the layers and layers of fees that your advisors, asset managers, custodians, trustees, administrators and a host of others charge as a “withdrawal” from your accounts. This isn’t a grammar lesson in double negatives. It’s simple math. Just because those fees go into your advisor’s pocket instead of your own, it doesn’t turn a negative number into a positive number. The drag on your returns from those fees is far from trivial and it can’t just be ignored away.

In 1965, Ralph Nader released his book, “Unsafe at Any Speed” which changed the way America looked at how they perceived the physical products they bought in the marketplace, especially defective products. Americans got a wake-up call that sometimes corporate interests weren’t exactly aligned with their best interests. In one now famous section, Nader recounts how Ford Motor Company actually ran the numbers on the risks and costs of their Corvair killing the occupants due to certain safety fail­ures and defects compared to the nominal costs of simply fixing it. As Nader notes referencing GM’s senior management team on the “Four­teenth Floor”: 

DeLorean says that after Bunkie Knudsen took over at Chevrolet in 1961, he was so concerned about the Corvair’s handling issues that he demanded that the camber-compensator be made standard. The roughly $15 cost to make and install it was deemed too expen­sive by the “Fourteenth Floor,” and he was turned down.

Apparently, because it was cheaper to simply pay off the survivors of the dead rather than fix the problems, they deemed it financially and therefore morally acceptable to spend their time and money on things that made the cars more saleable, not on making them safer. To John DeLorean’s credit, he threatened to resign if corporate brass didn’t allow him to fix the problem and management ultimately relented, although too late to save the Corvair. Incredibly, with the possible exception of John Bogle at Van­guard, the financial services industry sorely lacks a John DeLorean.

This book could have been titled “Unsafe at (Almost) Any Cost.” While there are no tangible products in the financial services industry, we learned the hard way in 2008 that expensive, poorly engineered products can be extremely hazardous to the well-being of your family and even the entire world’s economy. In fact, it was some of these so-called “synthetically engineered” financial products that multiplied over a short period of time like a virus and almost took down the entire global banking system. 

For all the brainpower expended, the industry doesn’t really add substan­tial value despite the massive amounts of wealth they collectively extract from us annually. For the most part, the industry is simply a giant platform to facilitate financial transactions, packaging money and reselling it at cost, after they take a piece for themselves. For this service the industry is richly rewarded with layers and layers of fees. Anyone who questions the often outrageous compensation in the business is met with the puffed-up, self-important response that the financial services industry “makes the markets work efficiently” or the always mystifying “we provide the mar­kets with liquidity.” 

If you work in the industry and that’s what helps you sleep at night, more power to you. I’m guessing that the executives who did the study on the Corvair conjured up some lie to help them pretend they didn’t have blood on their hands and they could sleep better at night, too.

Please don’t misunderstand. There are indeed truly valuable innovations, products and services and people in the financial markets. The mutual fund, its offshoot the index fund and the most recent evolution of the index fund into low cost, tax efficient exchange traded funds (ETFs) put the average in­vestor almost on a level playing field with the biggest players in the market. Products like basic term life insurance have most certainly been a bridge over troubled waters for millions of families that have lost a loved one. Even the much maligned annuity has a place in the market when used appropri­ately, rather than as a vending machine for high commissions.

Unfortunately, the “financial engineers” of the world have a way of taking the monetary equivalent of a simple hammer and turning it into a compli­cated tool with a fraction of the power and convenience, and a multiple of the cost. If you could model these financial innovations in three dimensions, they would regularly win awards in a contest for Rube Goldberg machines.

There’s an even bigger dirty little secret in the business. Judged indepen­dently, if a truly competent advisor were asked to rank his peers, he’d probably tell you that the vast majority of those peers are, in fact, incom­petent because they don’t dispense advice at all. They sell products. They are often great salespeople, but are somewhere between bad and terrible advisors. To be fair, they might be great at their job, but you, the consum­er, need to realize that their job doesn’t involve giving advice. 

The so-called financial gurus are not charged with providing you good advice like a doctor or lawyer or accountant. They are simply brokers who have been repackaged and renamed as advisors, or, sometimes for very technical legal reasons, financial consultants. They sell you products that are profitable for their company. As long as the product passes the exceed­ingly low legal threshold of “suitable and appropriate,” your money is fair game. If you finish reading this book and are still doing business with them, you are bound to get what you deserve. 

Most Americans are under the mistaken impression that their advisors or “consultants” are highly trained professionals obligated to do what is in their best interest when, in fact, that description only fits a narrowly de­fined band of the advisor community. Investors should understand that the tests to obtain a license in this industry are designed so that anyone with a high school education and a willingness to study hard for a few months, or even a few weeks, can call themselves a financial advisor. In fact, you don’t even have to pass a test to call yourself a financial planner. It’s liter­ally as simple as hanging out a neon sign that says “Financial Planning” as long as you don’t recommend specific investments. 

Confused? You should be. Even many in the business and policy-makers in government don’t understand the difference. Read on and you won’t be.

These supposed masters of the universe are by no means stupid people and, in many cases, they are truly brilliant. However, they laugh and spit in the face of common sense on a daily basis under the false assumption that they have a crystal ball that is better than the next guy’s. In the short term, some do. However, time in the financial markets is a harsh judge and statisticians quite successfully argue that the rare few who do manage to generate outsized returns over longer periods can probably chalk that success up to being lucky rather than good. 

This is not exactly a reassuring thought to the millions of investors try­ing to weed out the good from the bad. When choosing from more than 25,000 mutual funds in today’s market, you could probably pick ten ap­propriate investments out of a hat and do as well as someone who spent a year analyzing the data on that same basket of investment options and fund managers. 

The hard part, and one of the main reasons many actually do need an advi­sor, is getting the right mix of investments that is aggressive enough for the client to meet his or her goals, but conservative enough that the client doesn’t run for the exits when the markets turn south. But you should almost never pay someone many thousands of dollars annually for what typically amounts to less than a few hours of skilled labor a year.

If you ask investors how they picked their advisors and why they stick with them, the number one answer is always trust. Probably the single most important takeaway is that there are shockingly few truly trustwor­thy people in this industry. I define “truly trustworthy” as someone with the competence to advise you properly, fees that don’t interfere with your ability to achieve your objectives, and a business model that minimizes conflicts of interest. This definition would objectively eliminate well over 95% of advisors, probably including yours if you have one. Far too many investors simply throw up their hands and say well, that’s just the way it is done. Not anymore. And not if you want to get where you want to go on the financial road to retirement.

If you are now suddenly tempted to put down this book and forgo using an advisor altogether, keep in mind that I started writing this as a two part self-help book. The first goal was to show that good personal finance isn’t that complicated and that you can do it yourself if you are willing to put in the time and the effort. The second goal was to help guide you to select a good advisor and teach you how to negotiate and work with your advisor if you determined you didn’t have the time, training or temperament to manage your own financial affairs. 

Over time I have come to the conclusion that the first goal, teaching some­one to do it themselves, is impractical, although you may call that self-serving. What I have found is that while all kinds of ink has been spilled giving financial advice, the answer that’s right for you will never be found in a book or a magazine article because there are often multiple equally good answers and rarely one best answer. Your advisor isn’t there to find that elusive unicorn. He or she is there to lay out the real-world pros and cons of multiple good options and help you choose the solution that fits you. Quite simply, this is difficult for a full-time professional. For a part-time lay person, it’s virtually impossible.

Thus, I’ve narrowed the scope of this book to a single objective. Investors are generally smart which is why they have money to invest in the first place. Most investors are simply uneducated. This book is intended to educate smart people about how to identify a competent and trustworthy advisor and negotiate a fair deal for both parties while pointing out the many pitfalls between getting from Point A to Point B. 

I do believe that perhaps as many as 80% of American households don’t have enough assets that they need a full time financial advisor. Some sim­ple “over the counter” occasional advice is probably more than sufficient, although from an expense perspective it might not be particularly efficient. 

Similarly, the super wealthy or the much-ballyhooed 1% have access to what are known as “family offices” (or if they are simply extremely wealthy “multi-family offices”) who can represent the family or fami­lies and help them find competent services at a reasonable cost. Employ­ing someone for tens or even hundreds of thousands of dollars to do this makes perfect sense when you have hundreds of millions or billions to manage and protect. And make no mistake, these are some of the most fee-conscious consumers out there. There’s a reason they are wealthy. While they may pay more in total dollars, as a percentage of their portfolio, they are paying very little compared to the merely affluent, and far less than the average family.

This is less true for the simple everyday affluent families, the “19 Percent­ers” that have scrimped and saved to put aside a few hundred thousand dollars or even a few million dollars for education and retirement. This book is intended for exactly those working wealthy who may not be in a position to be setting up complicated tax shelters and charitable trusts, but certainly have a need to make sure the mortgage gets paid, the kids can go to college and that they can retire at a standard of living roughly equiva­lent to the lifestyle they enjoyed while working. 

This won’t be a detailed discussion about the problems in the industry, although many will be mentioned anecdotally so that you can recognize the pitch when it’s thrown at you. It’s also not a book about how to fix the industry, although more rigorous academic and professional standards for those dispensing so-called “advice” would be an extremely healthy start. Some suggestions will be touched on as they relate to the issues at hand. 

On that note, don’t hold your breath waiting for reform to happen and the politicians to protect you. These issues are lost in the Washington whirl­pools known as Congressional committees, most getting sucked down below the surface to spend eternity with King Neptune. With the amount of money that flows from Wall Street to Washington, almost all true and necessary reform drowns until there is a crisis when it emerges from the depths as a monster that ultimately drives up costs even further and be­comes the foundation of the next disaster. In the meantime the watchwords are caveat emptor, and you the emptor should find most of the caveats you need throughout these pages.

There is supposedly an old Chinese adage about how to make a small for­tune. The answer, start with a large one and wait a couple of generations. The real question is how do you make that large fortune in the first place and keep it? For those in the financial services industry the answer has long been to take a tiny slice of other people’s fortunes every year, forever. Those small slices add up to a death by a thousand cuts to the investor. Fortunately, this book serves as your primer on financial martial arts. It’s self-defense against those thousand tiny cuts. 

I’m not sure if any Chinese person ever really made that tongue-in-cheek quote about turning a large fortune into a small fortune, but famous Chi­nese general and philosopher Sun Tzu was most certainly quoted as say­ing, “If you know the enemy and know yourself you need not fear the results of a hundred battles.” 

This enemy is easily defeated by a savvy consumer. Do not doubt that and do not forget it. Understand it. Understand yourself. Do this and you will win the hundred battles in the war that needs to be waged to achieve your financial goals. Consider it hyperbole, or worse, ignore this advice and you will find it next to impossible to reach even modest financial goals. 

It’s not an opinion. It’s arithmetic.

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