The Investor is Never in First Place
From the fall of 1999 to 2007, I was an investment advisor with one of Canada’s largest investment firms. The experience was both educational and eye-opening. Today I will share how I was trained, how the profit motive drives everything, and who is really in first place (Hint: It isn’t you).
Investment Advisor Training
In January of 2000 the company flew me to Toronto, on Bay Street, for three weeks to learn how to be a broker. Here I am, this small-town boy from Thunder Bay, ON, being thrust into the “wolves’ den” so to speak. My initial impression was that I would be taught how to:
- Generate returns for my clients
- Customize investment portfolios
- Help clients get ahead by truly adding value
Instead, what I found was that instead of showing me how to make money for clients, I was trained on how to take my clients money, as much of it as possible, in the form of fees and commissions. The vast majority of effort expended is not to generate returns, but to gather assets, as many millions as an advisor can.
The firm’s top advisors all have gathered the most in assets, have the ability to “close” sales, and earn the most in fees from their client base. We were taught various tactics on how to become successful, for the firm first, the advisor second, and the investor somewhere down the line. The incentives provided to succeed are in the form of sales contests, with rewards for most assets and fees gathered. There are never awards for “highest investor return generated” or “most value added” to their investor base.
As for the investing public, they sometimes develop an illusion that a certain advisor must be good, just because they sit in the corner office, have multiple assistants, and have the title of “Vice President”. I was told the story of one advisor who, despite managing over one hundred million dollars, literally did not understand the concept of a bond. But he was so great at sales, and gathering assets and commissions, that he succeeded in spite of his stupidity.
It is just as likely that an entry-level advisor will generate similar returns to an established “corner office” VP. The Bay Street financial system is simply just set up this way.
Don’t Try to Control What You Cannot
One of the common sayings was “Don’t try to control the only variable that you cannot”, this being the market, so we were told not to worry about it. Just gather assets, place them into managed accounts where a quarterly fee is charged, stay balanced, and don’t blow anyone up. Overall this makes sense but it quite simply does not add much value to an investor’s bottom line.
In order to justify their existence a big brokerage firm must generate a lot of noise. This means reams of research reports, economic forecasts, technical research, quite frankly enough data generated every day that you could read for the entire day and not get through it all. All of this financial noise provides the illusion, again, that value is being added. At the same time the advisor is being told to not worry about the market (a bit of irony at work). And all of these reports are put together by analysts, and economists, etc, who are paid extremely large salaries. And guess who pays for all of this noise? You do!
Where Your Fees and Commissions Go
Have you ever stopped to think about what your brokerage fees buy? Here are some of the most important items:
- Office lease
- Fancy furniture, computers, desks, quote machine, etc
- Assistant salary
- Investment Advisor commission
- Regional VP compensation
- Marketing and Sales Department
- Fancy brochures and swag
- Head office personnel and office buildings, infrastructure, compensation, etc
- Analysts compensation
- Due diligence and award trips
- Compliance Department (a requirement of course)
- Trading desk compensation
- Firm profit
That’s a lot of slicing for each and every dollar you pay in fees. With all of these financial pressures to perform and produce, it’s no wonder client returns are not high priority, as the machine must be fed on a continual basis, and parent shareholders answered to. This setup makes the financial success of your retirement much lower down the totem pole of priority.
The Irony of it All
Generally, the lower you pay in fees as an investor, the higher your investment returns are. Study after study confirms this. Yet the brokerage firm is motivated to maximize profit, and the higher the fees charged the more profitable the firm becomes, to the point where it can be argued that many investors and their advisors are in fact in an adversarial relationship.
This is the part of the business which gradually made me disillusioned over time. Because of the contradiction, which most advisors recognize, being a traditional investment advisor in the stocks & bonds/ mutual fund world eats a little bit of your soul on a daily basis. You either become immune to it, because the financial rewards are so intoxicating, or you leave and do something about it. Through my blogposts, and the way my current advisory practice is set up, I chose the latter.
Don’t Blame Your Advisor
While the above is a reality, it is also true that the majority of the financial system is populated by extremely intelligent, hard-working, and well-meaning individuals. These individuals just happen to be a part of what we can call the “Bay Street System”. The blame should never be placed directly on the advisor, who is just “doing his or her job”, based on the confines of the system.
The Good News
Now that you are able to identify how the financial system operates, the next step is to remove yourself from it as quickly and as far as possible, to turn the tables and ensure that you (the investor) are in first place when it comes to your money. All of the possible solutions are beyond the scope of this article but they certainly do exist. One is purchasing extremely low-cost ETFs instead of mutual funds. Another would be examining what the smartest money in the world invests in. Our very own Canada Pension Plan would be a great start. Take a look for yourself and see just how differently CPPIB manages money. Their risk-adjusted results are a testament to this strategy. It may benefit you to adopt a strategy that is more similar to CPP and less so than the Bay Street System.
It probably doesn’t come as a huge surprise that the financial system works this way, and is primarily in place to extract as much money from investors as possible. I think many people intuitively understand this. Start getting curious and you will discover that there is more than one way to manage your investment money. If you have any questions, or would like additional information, feel free to contact me by clicking this link. All inquiries will be addressed with no bias or obligation.
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