Most likely, your financial advisor works for a company that puts company interests before your interests. This is because the overwhelming majority of financial advisors work at publicly traded companies, and they have to put their interests before yours. They are not financial advocates.
The same companies that may be excellent investments (as an owner) are not companies that are excellent for you to invest with (as an investor). Most investors have their money invested with a publicly traded company because their advisor works for a publicly traded company. The problem with this is that publicly traded companies are legally required to put the interest of their shareholders (the people who own shares of their stock) before the interest of their clients.
As an investor in a company, this is exactly what you want. You want to make sure that the folks running the company are working in the interests of the folks who own the company. But as an investor looking for someone who will always put their interests first, this presents a conundrum.
It is literally impossible to put shareholders (the folks who own shares of the company) first and clients’ interests first. More than $37 trillion is invested in open-end funds globally. This staggering amount is more than twice the annual value of the U.S. economy ($18 trillion a year). That’s a lot of money.
Hardly any investors know how banks and insurance companies make money, but they can see that banks and insurance companies will do anything to get their hands on money. One easy place to get it is from the fee that mutual funds charge. The average expense ratio of U.S. equity funds is 1.3 percent, which means these fees are hundreds of billions of dollars a year.
There is so much money at stake.
Bankers Behave Badly Because Their Bosses Make Them Do it – They Make Them “Cross Sell”
Big banks must put their shareholders’ interests first, so they create all kinds of schemes to make sure the people working for the bank do so. This results in some pretty bad behavior. We call the practice of trying to maximize revenue from clients cross selling.
Cross selling is the way the big banks (in particular) use every arrow in their quiver to make money. Because they already have you as a client, they can offer you their many goods and services.
Remember the last time you talked to someone at the bank? Were you asked to:
- Open a line of credit on your home or refinance your mortgage?
- Open a new credit card account?
- Roll-over your 401k?
- Consider a “no risk” annuity for your investments?
You probably didn’t go there to get investment advice. More than likely, you went there to deposit a check or get money.
Banks are in the business of making money. But what you might not know is that the bank has a legal duty, a fiduciary duty, to put shareholders’ interests before clients’ interests. Wells Fargo is one of two banks in the U.S. that is so profitable, it earns a Morningstar “wide moat” status, meaning it will likely make more money than competitors (for 20 years or more).
If you are a shareholder (and own the stock), then Wells Fargo is a great business. That’s why Warren Buffet owns shares of it. He owns it because Wells Fargo is one of the best in the business at cross selling.
But Wells Fargo might not be such a great business for you as an investment client. Remember, if shareholders’ interests are first, clients’ interests are not.
In September 2016, Wells Fargo got caught in illegal activities that were a direct result of putting shareholders’ interests before clients’ interests. Employees secretly created millions of unauthorized bank and credit card accounts without client permission. They did this under pressure from their CEO. As a result, 5,300 employees were fired because they unethically tried to meet high sales targets.
Can you imagine the pressure on those employees?
Every publicly traded company is required by law to put shareholders’ interests first. Bank of America, Raymond James, Morgan Stanley and others must put shareholders’ interests first.
Now imagine the lengths these companies will go to make money advising investment clients. You see, in addition to putting shareholders’ interest first, there are other conflicts. Banks can be paid by clients but also by mutual funds and insurance companies, and banks can profit from proprietary trading.
These banks are not like George Bailey’s bank in “It’s a Wonderful Life,” a favorite movie of mine.
The more you learn about these conflict of interests, the more you realize it doesn’t make sense for serious investors (and your friends and family) to invest with a bank (or insurance company).
What to Do About It
We know investors are starving for good financial advice and portfolio management structured to avoid losing money they can’t make back.
Here’s what you should do:
- Find a truly fee-only (not just fee-based) financial advisor. In order to be fee-only, your advisor can’t be paid by anyone but you. This means that he or she cannot have a securities license or an insurance license. Fee-only advisors are investment advisors employed by Registered Investment Advisory firms (not a bank, brokerage firm or insurance company).
- Seek an advisor working for a privately held Registered Investment Advisory firm. Remember, public companies are legally required to put their interests first, which means there will always be a conflict of interest between what you need and what the company wants. Their objective will always be to maximize profits for their company shareholders.
- Ask you advisor how he or she invests your funds and get the answer in writing. Does your advisor invest in the same things you are in?
- Never confuse insurance with investments. If your advisor can sell insurance, your advisor will. You should never work with an investment advisor who can also sell you insurance.
You deserve better. Imagine, what would it be like if you could work with an advisor who would always put your interests first?
Unfortunately, this world is a very small one. Financial advisors will advise based on how they are incentivized to advise. Because most financial advisors work for a publicly traded company, most of the time, they have a legal duty to put their company’s shareholders’ interests before yours. This means that if your advisor is employed by a bank or insurance company, odds are good that he or she has to put shareholders’ interest first.
Global View is not publicly traded, which means we don’t have this conflict of interest!
Global View Investment Advisors is a fee-only, fiduciary financial advisory firm that is truly independent and provides conflict-free advice and complete wealth management services so investors can protect and maximize the wealth they’ve built. Contact us to learn more about how we can help you.
