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Why Most Financial Advice Is Useless

It’s no secret that we are in a serious financial crisis. Some of the largest companies in the country are facing bankruptcy. Foreclosures are at an all-time high. Layoffs are creating hardship for millions. Many people’s retirement accounts are down 50%. People are wondering how they’re going to survive.

Part of the reason that this financial crisis has been so damaging to millions of people is that they took bad financial advice. Most people who have a 401(k) or IRA account had no idea how to invest their life savings. So, they met with a financial advisor. This advisor may have been provided to them by their 401(k) company, or perhaps they found the advisor on their own.

Most financial advisors recommend putting your money in a combination of stock funds and bonds funds. The traditional idea is to put more money into stock funds when the client is younger. Unfortunately for the client, stock and bond mutual funds are the worst possible investment they can make. There are a few good reasons that these mutual funds are widely recommended and are the de facto investment vehicle for most Americans:

The Advisor Receives a Commission for Selling Mutual Funds
Advisors get paid when they sell mutual funds to their clients. This is how they advisor makes a living. Most advisors are pretending to give advice and guidance, but actually they’re just selling mutual funds. Many mutual funds have a load, which means that you pay to buy or sell them. In this way, the client’s money is given to the advisor. Often this load is a few percent, which sounds like a small amount of money. But actually it is a percentage of the total amount invested, so it ends up being thousands of dollars, which is a lot of money.

Mutual funds are the Best Investment that the Advisor Knows
Most advisors really know very little about investing, and survive on the fees they receive from selling mutual funds to their clients. These people are not evil or trying to scam us. They are simply recommending what they know and understand, and what they invest in themselves. Unfortunately for their clients, mutual funds are a very poor investment.

This means that when people are seeking investment advice, they’re actually receiving a sales pitch. What usually happens is that advisor uses so much mumbo-jumbo that the client becomes confused. Being unable to come up with an answer for themselves, the client will typically go along with whatever the advisor recommends.

It’s Easy to Invest in Mutual Funds
It only takes one decision, and the financial advisor helps with all the paperwork. Once the decision is made, the retirement account company simply sends a statement to the client once a quarter. The investor does not need to do anything. He does not even need to look at the statement! This system allows investors to forget about their investment, and even ignore it when it’s doing poorly.

Other investments are not so easy. Consider real estate. Buying a property and managing it requires a lot more work than a single meeting with an advisor. Starting a business requires time and effort on a daily basis. Choosing individual stocks can require serious work in figuring out which ones to buy.

Since mutual funds are so quick and easy, many people choose them. Taking financial advice from an advisor is easy. It’s like going to McDonald’s and choosing.

I’ll have a Number Four.

It requires very little work, very little effort, and appears to be cheap. However, like McDonald’s, the cost only becomes apparent later, because fast food destroys people’s health. It’s easy and it tastes good. At the start, we fail to count the cost. At the end, we always pay the price.

This is the first in a series of posts entitled Secrets the Financial Industry doesn’t Want you to Know.

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  1. March 23rd, 2009 at 03:55 | #1

    Great post!

    I also want to point out that if you think about it, why do people invest in mutual funds? They invest in mutual funds because mutual funds make up many companies. People invest in many companies because they don’t know what their doing (myself included).

    We also bought into what an adviser told us regarding mutual funds. I wish we hadn’t, but we have since learned.

    If I were to invest now, I would probably invest in a no load index fund of some sort. Again, the philosophy is to diversify simply because people don’t know what they’re doing. If people knew what they were doing, they would pick a specific stock or commodity.

    Thanks!
    -Dustin

  2. March 23rd, 2009 at 09:07 | #2

    @Happiness Is Better
    Hi Dustin,

    Thanks for your thoughtful comment. Yes, I agree with you 100%. Diversification is a hedge if we don’t know what we are doing.

    Love your blog!

    George

  3. June 18th, 2009 at 17:19 | #3

    Hi
    Its easy to kick a man when he is down. Don’t see much positive advice here.
    There are many well qualified financial advisers who give much better advice than you suggest. A bank employed adviser may sell just mutual funds at the first meeting but an independent financial adviser will meet the client for several meetings.The first is to understand the clients position then after specific research present a solution. Many will give a third meeting free and more if the client needs it.Independents especially offshore advisers will have a very wide selection available. But there is much more to advise than where to invest.
    This crisis is the worse imaginable where almost everything has gone down drastically. Can I just say that I designed a portfolio that did not go down but held steady. I know other advisers with equal sucess. I will make this knowledge available on my web site when I finish revamping it.

    Financial advice has still a long way to go. We are always learning.
    I appreciate the opportunity to respond. Thanks
    regards
    Brian

  4. June 18th, 2009 at 17:36 | #4

    @brian
    Hi Brian,

    Thanks for your comment. Yes, you are right. The post is very opinionated and lumps financial advisors into just one group. I suppose there are good and bad financial planners, as there are good and bad in every field.

    I am curious about the portfolio that you designed. What’s in it?

    And, yes, I agree that we are always learning and improving.

    George

  5. June 20th, 2009 at 05:22 | #5

    I have to agree with Brian.
    I think most financial advisers are probably good people doing the best they can to help their clients; a minority are frauds.
    What I’d like to suggest is having a financial adviser tends to distant people from managing their own affairs. Even if you have someone helping to manage your money, you still have to take responsibility for your financial freedom. No exceptions.

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