Protect Yourself From Stock Vultures
When it comes to financial advice, where do you turn?
If you’re like most people you turn to your broker. The problem with brokers, as my rich dad’s old joke goes, is that they are often broker than you.
The reason for this is that most brokers are simply salespeople. They do not actually invest their money. They simply know how to push the various financial vehicles that their employers—big banks and mutual funds—are asking them to push. One of the biggest problems with money in America is that most people are getting their financial advice from salespeople rather than from rich people.
Speaking of brokers, Warren Buffett once said, “Wall Street is the place people drive to in their Rolls Royce to take advice from people who ride the subway.”
If people do not have sound financial education, they cannot tell if a financial advisor is a salesman or a con man, a fool or a genius. Remember, all con men are nice people. If they were not being nice by telling you what you want to hear, you would not listen to them.
There is nothing wrong with being a salesperson. We all have something to sell. Yet, as Warren Buffet says, “Never ask an insurance salesman if you need insurance.” When it comes to money, there are many people desperate enough to tell and sell you anything, just to get your money.
Interestingly, the vast majority of investors never meet the person taking their money. In most of the Western world, employees simply have their money automatically deducted from their paycheck, the same way the tax department collects taxes. Many workers in America simply allow their employer to deduct their money and put it into their 401(k) retirement plan, possibly the worst way to invest for retirement.
Buffett is among the richest men in the world. He built his wealth by being one of the most sophisticated investors in history. The secret to his success in investing comes from the fact that he treats it like a business and understands how business works. As Buffett says, “I’m a better investor because I’m a businessman, and I’m a better businessman because I’m a better investor.”
Are You Getting The Value You Deserve?
In the example of a plumber, if you need a serious leak fixed in your pipes, it is almost always better to call the plumber. If that plumber shows up and does the job correctly, the leak is fixed and you pay him. If not, you don’t pay (and you find a better plumber!)
Brokers, on the other hand, get paid whether they make you money or not. Most professional money managers charge 2% for simply managing a fund. And if that fund makes any profit, they take 20% of that profit.
As Buffett says on that 2% management fee, “If you even have a billion-dollar fund and get two percent of it, for terrible performance, that’s $20 million. In any other field, it would just blow your mind.”
If someone is trying to sell you something they will only tell you the good news, the upside. They focus on the positive aspects in order to convince you to buy and leave out the negative aspects that might scare you off.
If someone is trying to educate you they will tell you the good and the bad, because they want you to have the information you need to make the decision for yourself, based on what is truly in your best interests.
This is important to keep in mind not only when talking with brokers, investors, and the like in your financial dealings, but throughout life’s activities. If a broker is only telling you about the upsides of a property, you know you’re being sold. If a political candidate only tells you about the upside of his proposed initiative, you know you’re being sold. Often times what people don’t tell you can be as informative as what they do tell you. Keeping this in mind will help you avoid being duped.
Do You Believe In Magic?
As Buffett points out, the reason most investors stick with their brokers is that there is an illusion that they can “do something magical for them.” In reality, that simply isn’t the case.
As Bloomberg points out, “The average hedge fund gained about 2 percent this year through April compared with the rise of about 6.5 percent in the S&P 500 Index.” Both are poor returns, but at least if an investor parked his or her money in the S&P 500, they wouldn’t have a poor return made worse by 2% management fees and 20% commissions.
But the reality is that most investors aren’t really investors, just like most brokers aren’t either. Because people have such a low financial IQ, they are very intimidated by money and investing decisions. They would much rather believe in the financial fairy tale that brokers are the best way to go when it comes to growing your wealth.
An Investor’s Biggest Risk
Rich dad said, “The biggest risk of all is a person who has no control over his or her personal financial statement.”
He also said, “A professional investor wants control. And that control begins with yourself, your financial education, your sources of information, and your own cash flow.”
The number one reason most people stay poor is that they simply do not take control of their money. They outsource it, often to those who have no more qualification to manage it than they do and are simply looking for more people to sell to.
Package Investors vs. Sophisticated Investors
Package investors call a retail outlet, such as a real estate company, a stockbroker, or a financial planner, and buy something. It could be a mutual fund, a REIT, a stock, or a bond. Packaged investing is a clean and simple way of investing.
A sophisticated investor, however, does the opposite. They create the package by finding an opportunity that everyone has missed, raising the money required to make the investment (most often from OPM), and organize the right team of smart people to make it happen.
How To Find And Utilize The Right Broker
Now, the right team can and often does include a broker, but the key is finding the right broker.
The brokers Kim and I work with are professional investors who practice what they preach. They are rich themselves and help others get rich. Most importantly, they get results and they get paid for those results. But that broker is only part of a full team, and he or she is not the quarterback of the team. We are.
Usually, we put all these team members, including our broker, through a set of filtering questions. These questions are:
- Is the person offering the advice successfully doing what I want to do?
- Does the advisor practice the advice they preach?
- Is the advice clean of commercial ties, biases, and paid endorsements?
- Is it really financial advice or a sales pitch?
- Are they interested in creating a long-term relationship, or do they view this as a one-time transaction?
- Finally, do you trust this person? In your gut, do you feel they are ethical, moral, and forthright? Do you trust them to tell it like it is?
If there is a wrong answer to any one of these questions, we don’t want them on our team.
Be the quarterback of your financial team. Take charge of every financial decision, and don’t let anyone steer you away from your goals. If you’ve assembled a strong team around you, they will support you every step of the way. They will offer their advice, and help you assess the playing field, and consider all your options. But at the end of the day, you’re the one who calls the shots.
Editor, Rich Dad Poor Dad Daily