Myth Busting the Wealth Management Industry

Like millions of Americans, I was sad to see the Mythbusters show go off the air this year.  I’ve been watching them since the very beginning and was thrilled over the past couple years to see my kids get into the show.  If you are unfamiliar with the setup, they take common urban myths and test to see if they can replicate the results.  They categorize the results as either confirmed, plausible, or busted.  My goal with this post is to go through a similar exercise on common myths in the wealth management industry.  Here we go!


Myth #1: A great financial advisor will make you rich.

Many people think that if they just find the right advisor, someone with incredible investment skill, they can turn a little bit of money, into a lot of money.  So, will a great financial advisor make you rich?

To test this myth, let’s look at two of the greatest investors in the world; Warren Buffett and George Soros, who have put together two of the best performance track records in history.

  • Warren Buffett: 21.6% annual return from 1965 to 2015
  • George Soros: 30% annual return from 1973 to 1993

For sake of argument, let us assume that you are able to find a professional money manager on par with Buffett and Soros who takes you on as a client. You invest a hard saved $50,000 with this superstar who (averaging the Buffett and Soros results) manages to return 25% per year for the next six years. Surely, after six years investing with a combination of two greatest investors of all time, you should be ready to think about retirement, right?

$55,000 invested for 6 years at 25% per year will turn into $155,000. Not Bad!

$55,000 invested for 6 years at 25% per year will turn into $155,000. Not Bad!

While anyone would be thrilled to turn $50,000 into $155,000 after 6 years, this hardly puts you into a new socio-economic bracket.  So unfortunately, while you are better off and have more cash in the bank; this advisor did not make you rich.

It is a sad reality that the world of financial advice is well populated with promises of riches.  Watch a couple episodes of the CNBC show American Greed and you will see numerous cases of people getting caught into investment scams because they wanted to believe that they found an investment advisor or some financial product that could make them wealthy in a short time.

So this myth is busted correct?

Not so fast.  Is it possible for a financial advisor to make you rich?

Here are the ways a financial advisor could make you rich:

  1. Helps institute a solid plan of saving assets and investing them into a portfolio of market-based securities on a regular basis – this is called dollar cost averaging.
  2. Thoughtfully avoids unnecessary risks and protects your investment portfolio from the worst of market shocks, and keeps you from emotionally putting money into or out of the market.
  3. Does this for many, many, years.

Therefore, we need to call this myth – PLAUSIBLE

Myth #2: You Need to Have a Lot of Money to Receive Good Financial Advice

This is a myth that I hear often.  People will say “I don’t have a million dollars so you probably wouldn’t take me as a client” or “I can’t have my money invested for me because I only have “X” dollars”.  Unfortunately, like most everything else in the world, having a lot of money does allow you to buy premium services, but, does that mean that the rest of us are doomed to figure it out on our own?  Let’s find out.

First of all, the industry does segment clients depending on the amount of their investable assets.  Services are then provided to each segment accordingly.  While the dollar amounts can vary depending on the region or the specific firm, here are some general break-points of wealth and how those clients are typically served:

  • Ultra-High Net Worth:  $50 million plus (full family office services)
  • High Net Worth:  $2 – $50 million (wealth management)
  • Mass Affluent:  $100 thousand – $2 million (wealth management and investment advisory)
  • Middle Class: $5 thousand – $100 thousand (investment advisory and online brokerage)

So even people who have less than a million dollars (or even less than $100 thousand) have access to financial services.  The question is how does someone in the middle class increase their chances of getting good advice?  This can be a challenge because there is a much higher amount of scam artists, liars, and charlatans among the advisors working in this segment.

When engaging anyone to advise you with your finances, your radar needs to be on high alert and looking for the following red-flags:

  1. Higher returns for less risk.  If something sounds too good to be true, it probably is
  2. Indirect answers to questions on fees.  What fees are you paying, and how is the advisor compensated?  Is he commissioned or salaried?  Is he getting any kick-back from the funds he is recommending?  If an advisor has trouble answering any of these questions, be wary.
  3. Someone not operating under a fiduciary standard.  It is important to know the difference between a fiduciary standard and one of suitability.
    • Someone with a fiduciary standard of conduct is legally obligated to act in your best interest.
    • Someone with a suitability standard of conduct is only required not to sell you something completely unsuitable for your situation.
  4. An advisor that uses highly technical terms and jargon.  The more an advisor uses these, the more cautious you should be.  If they cannot explain something simply in everyday terms, then they do not understand it themselves.

Of course, there is also a lot of free advice floating around on the internet, but again you have to be careful.  Make sure the information you are getting comes from a reputable source, and never rely on just one source to help you make decisions.  Check out at least three sources and know that if you are going to do it on your own, you need to make sure you are educated on the topic.  I would start by checking out my book list, found here.

It may require a bit more work from the consumer’s end, but it is possible for people with relatively little in investable assets to receive great financial advice!  The advent of robo-advisors and increasing popularity of exchange traded funds (ETFs) is pushing down costs for entry level investors making it increasingly affordable as well.  The best way to assure that you are getting good advice is to be a smart consumer – check references, interview several options, check for red-flags, and ask direct questions on fees and expectations.

This myth is – BUSTED

Myth #3: A Great Financial Advisor is Someone Who Can Beat the Market on a Consistent Basis

This myth needs to be broken down into two separate parts.

1)      Is it possible to beat the market on a consistent basis?

2)      Is that what makes a great financial advisor?

When investors talk about beating the market, typically they mean that they can buy and sell specific stocks to earn a return greater than the market as a whole.  The market is most often measured using the S&P 500 index, which is the 500 largest stocks on the market.  There is also the Dow Jones Industrial Average of 30 stocks (the Dow), which is more popular on television and radio but not used nearly as much as an actual benchmark.  It should also be noted that these indexes are based in the United States and someone investing in international stocks would use an international index for a benchmark.

So can an advisor beat the market on a consistent basis?  One of the most famous mutual fund managers of recent times is Bill Miller of Legg Mason.  Through his mutual fund, the Legg Mason Value Trust, Bill Miller outperformed the S&P 500 15 years in a row – a truly spectacular feat.  Bill was put on the cover of magazines and lauded as the greatest fund manager in history.  Then his fund underperformed the market in 5 of the next 6 years and Bill Miller stepped down and turned full management of the fund to his understudy.

So while consistently beating the market year after year is nearly impossible, it is possible to beat the market over a long period of time.  Maybe you cannot beat the market every year for five years, but you could beat the market over a five-year period.  Research shows that this is most likely if you focus on long-term results, utilize a value approach, and invest in smaller than average companies.  Even still, should this be the gage of what makes a great financial advisor?

Let’s say you have $40,000 to pay for your child’s college tuition payment due in 2 years.  Your advisor invests this money in an aggressive portfolio of all stocks to try to earn a higher return.  The first year the market is up 4% and your advisor is up 6%.  He smiles broadly as he reports the good news to you that he did his job and beat the market.  The next year the market is down 20%, and your advisor confidently reports that he was only down 15%.  Again, he did his job and outperformed the market.  The problem here is that your $40,000 is now worth $36,000 and if you were counting on it to pay tuition, unfortunately now you will have to pull some money out of another bucket to compensate the difference.  Was that a great financial advisor?  I would say not.

One of my role models in the investment management business is David Swenson, the Chief Investment Officer of the Yale Endowment.  His quote sums up my thoughts on the matter:

“Failure to achieve investment goals defines portfolio risk in the most fundamental way” – David Swenson, Chief Investment Officer, Yale Endowment

By putting your money in an all stock portfolio, he did not invest according to the goals you had laid out for that account and took an inappropriate amount of risk.  This advisor completely failed in his job.

A great financial advisor is someone who:

  1. Takes time to understand (and in some cases, help identify) the goals you have for your assets.
  2. Incorporates advice from tax, legal, and other professionals to allocate assets in the most efficient way possible, so as to minimize the risk of not reaching those goals.
  3. Invests the portfolio in a way that meets clearly communicated expectations, and delivers results which can be measured and evaluated.

This myth is – BUSTED.

So to review:

Myth #1:  A Great Advisor Will Make You Rich – PLAUSIBLE

Myth #2: You Need to Have a Lot of Money to Get Good Financial Advice – BUSTED

Myth #3: A Great Financial Advisor Will Beat the Market on a Consistent Basis – BUSTED


Until Next Time….

“An investment in knowledge pays the best interest.” – Benjamin Franklin


Disclosure:  The image above is a promotional image from Mythbusters the television show.  Unfortunately, this blog is in no way affiliated with the Mythbusters show, Discovery networks, or any of the Mythbusters.