Why You Should Never Trust an Investment Adviser

How Do They Make Their Money?

When you're talking to an investment adviser, the most important question to ask yourself is How do they make their money?

Jim Cramer, and financial pundits like him, make money by going on cable television and suggesting that people buy and sell different things. Cramer can't have a show unless he has some content to fill the space of time between commercial breaks. Ergo, he, and people like him, must always be advising about a level of activity in the stock markets. These folks cannot be trusted.

Even more level-headed advisers, without all the funny noises and complicit guilt in the Great Recession, like Robert T. Kiyosaki, the author of Rich Dad, Poor Dad, make their money by selling advice. If they run out of advice to give, they run out of things to sell. This is why they are, at the end of the day, untrustworthy.

Websites like The Motley Fool and The Street exist to get you to go searching through their content for things to buy. You cannot trust them, because they are producing content about the markets, designed to get you to look at their website, and make purchasing decisions informed by the latest headlines, instead of engaging in an actual, long-term strategy.

Even individual brokers with whom you can sit down and look in the face are unreliable. They make money by managing your money. They earn income by getting you to do things with your income. They rack up brokerage fees, mutual fund management costs, and sales commission on things they convince you to buy.

Whenever you deal with an investment adviser, it is important to remember that you cannot actually trust them!

Don't worry! This doesn't mean you can't get some good advice from them, as long as you remember their ulterior motives!

How Do You Get Good Advice From Someone You Can't Trust?

Just because someone can't be trusted, it doesn't mean they're trying to take advantage of you. Not every financial adviser operates like a scam artist. Many of them are honest men and women, who genuinely care about their clients. Finding a good financial adviser is an important step in your retirement planning and investment strategy.

Also, remember that financial advisers have certain products they're trying to sell, and the general strategy behind their systems are applicable beyond just this one investment institution.

Financial advisers at reputable credit unions and banks will offer sound financial advice about the products they're selling, and help you create a strategy for your own retirement. They're just going to do it in terms of the products their bank or credit union offers.

Just because they advise you to buy into their companies' mutual funds, doesn't mean you have to. Take the funds they offer at their company and compare the loading fees and management costs with similar funds on the open market. Often times, discount brokerage firms like Vanguard will provide a better version of the very sort of thing you're trying to invest into.

Always make sure you are the one who has to write every check, and make every decision. Don't ever work with anyone who wants the authority to handle your funds!

Also, the real key to a successful retirement portfolio is investing, not speculating. If you are engaged in weekly activity in your brokerage account, or your retirement portfolio, you need to rethink your strategy and investment distribution to reduce the brokerage fees and tax costs of your activity.

Remember, you can't trust them, but very few of them are literal sharks looking to pilfer your pocketbook. Most of them are honest people, working as honestly as they can for their clients.

Also, don't forget to look around you at your own friends and family, and ask around to find out who the successful investors are. Often times one of your family members is more than qualified to give you sound financial advice, and help you secure your retirement. These individuals can offer a sound counter-balance to the advice you receive from your financial adviser.

Bubbles Come From Speculators!

Why did the Real Estate Industry nearly collapse the global economy? Simple: Greed. 

Speculators in the markets invest in companies not because they believe in this or that company's business-model, but because they believe the company will offer them a large return on their investment. This form of investment can be profitable to the sharks in the economic waters and hedge fund managers, but for everyone else it's a fast way to lost a lot of money in the markets through brokerage fees and poorly-timed investments.

And, the average investor bears the financial burden when these bubbles explode. Greedy investors seeking to profit on the advice of financial advisers will fall for the trap and watch their investments implode soon after the sharks in the water have pulled out their investments.

If You Can't Make Sense of the Investment, Don't Do It!

When your financial adviser is trying to tell you about what it is that this or that investment happens to be, avoid anything that cannot be adequately explained to you in a simple, consistent manner. 

For example, if the adviser offers a fund that invests aggressively in different, high-growth potential stocks, ask the adviser what stocks are purchased and why they are selected. If the answer takes more than two sentences, it is a fund you might want to consider avoiding. For example, an investment in an index fund of the energy industry is easy to explain. "The fund invests in a broad index of energy companies, to track the success of an industry that will increase in value over the next twenty years as energy consumption goes up." Yes, that makes sense. If the fund searches for various metrics and special warning signs in balance sheets with special equations pioneered by economists at some foundation or special research group, you might want to skip that one. At the end of the day, no fancy tricks of numbers can hide the fact that good businesses, with a solid long-term strategy and good management practices will create value over time for their investors. Any strategy for choosing stock that gets more complex than that probably doesn't deserve the Ph D's that invented it.

Ask yourself this, with every investment, "Can my financial adviser explain this to me in a way that makes ridiculous amounts of logical, rational sense? Could this be explained on the back of an envelope?"

Financial advisers that are good at what they do, and have the best interests of their clients at heart, are going to focus on just these sorts of investments, and leave the shenanigans to the clowns on cable television.

Who am I?

I am not a financial adviser, but I've lost a lot of money on the advice of some good ones. What I know, I learned the hard way, and I hope others can benefit from my mistakes.

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Ralph Deeds 5 years ago

Good advice. If you want an adviser get a fee only adviser. Many investment advisers make their money from commissions on investment products they sell to their clients. Their advice is not unbiased. Vanguard offers a lot of free information to the owners of their mutual funds. For most people two or three Vanguard no-load, low cost, tax efficient index mutual funds are a good choice, in my opinion.

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