I’ve been a fan on Tony Robbins for as long as I can remember. I remember well his late night infomercials hosted by Fran Tarkenton and Leeza Gibbons. In terms of teaching people how to achieve peak performance and managing their time, Tony is one of the best to ever do it. I’m not as confident in his role as a financial guru.
I was expecting to read a book about portfolio management and different strategies for investing success. Instead, I got a book that was one third investment related, one third how to achieve personal fulfillment and one third advertising for the financial services company that Tony is on the board of and serves a “Chief of Investor Psychology”. Seriously? That being said, it was about as good as I’ve read regarding some basic steps that novice investors can take.
This book spends a great deal of time on the emotional side of investing and I think that puts it ahead of most. I would say this this is a worthwhile read.
A good portion of the book is devoted to the reduction of the fees that come along with some investments. The same argument about active fund managers not being able to beat the S&P 500 Index on a consistent basis was trotted out there again. I have some thoughts on indexing that I’ll express in another post.
The most useful part of the book, to me, was the discussion about how to select a Financial Advisor and the differences between types of advisors:
All financial advisors fall into one of three categories:
2.) Independent Advisor
3.) A dually registered advisor
In Tony’s Words: “Ninety percent of all financial advisors in America are brokers. They’re paid a fee or commission for selling products. Many of them work for enormous Wall Street banks, brokerage houses and insurance companies – the kind that splash their names on sports arenas. Brokers don’t have to recommend the best product for you. All they’re obliged to follow is the suitability standard. That means they must simply believe that any recommendations they make are “suitable” for their clients. Suitability is an extremely low standard. The problem is, brokers and their employers earn more by recommending certain products. Does it sound to you like there is a serious conflict of interest there? Damn right!”
Independent Advisors (Fiduciaries
Also known as “RIA’s” or “Registered Investment Advisors”.
In Tony’s Words: “Of 308,937 financial advisors in the United States, , only 31,000 – approximately 10% – are Registered Investment Advisors. Like doctors and lawyers, they have a fiduciary duty and legal obligation to act in their clients best interests at all times. To give you a sense of how strong the laws are, if your RIA tells you to buy Apple in the morning and buys it for himself at a cheaper price in the afternoon, he has to give you his stock!”
“In addition, before doing business with you, your RIA must disclose any conflicts of interest and explain upfront how he is paid. No hocus pocus, nothing hidden, no tricks, no lies, all cards on the table! How come there are so few RIA’s, if this is such a superior model? The most obvious reason is that brokers tend to earn a lot more money. All those fat fees from selling financial products can be extremely lucrative. By contrast, RIA’s don’t accept sales commissions.”
Dually Registered Advisors
In Tony’s Words: “So it seems obvious to insist on working with an independent advisor who is legally obligated to act as a fiduciary. I thought of fiduciaries as the gold standard. But then I discovered that this subject is murkier than I realized!”
“Here’s the problem: the vast majority of independent advisors are registered as both fiduciaries and brokers. In fact, as many as 26,000 of the 31,000 RIA’s operate in this grey area were they have one foot in both camps. That’s right: only 5,000 of the nation’s 310,000 financial advisors are pure fiduciaries. That’s a measly 1.6%. Now you know why it’s so hard to get unconflicted and transparent advice.”
“In other words, they’re sometimes obliged to serve your best interests and sometimes not!”
I’m happy to say that I am, in fact, among the 1.6% of advisors that are truly conflict free, according to Tony.
When I was looking at the different business models available to independent advisors, I interviewed a lot of people that chose different paths. I wanted to understand their decisions, and their motives.
I remember specifically speaking to one gentleman about his choice of investments for his clients. He used a product called “Unit Investment Trusts”(UIT). Briefly, these are investment products that are baskets of individual stocks built around different objectives (growth, income,sector). Some of them are gimmicks, such as a “Dogs of the Dow” UIT. These products “self liquidate”, which means they are sold in their entirety at a date in the future, typically one year. You have no control of the portfolio and no control over the tax ramifications and the investor pays an early termination fee if they don’t stay in it for the whole term.
Can you guess why anyone would offer this product to a client? Commissions, you say? It seems like you’ve been paying attention then! The broker, in this case, got a three percent commission on the sale of this product. Three percent! Oh, and he could get that three percent every year by selling you the same type of product every year when it liquidates.
The reason you don’t read about these types of investments in books that promise financial independence is because often the author hasn’t spent a day of his life in the industry. You keep getting the tired old active manager underperformance versus index funds. Mutual funds are the devil, it seems, to some.
There is an awful lot of money to be made in the financial services business, if it doesn’t matter how you do it. My personal opinion is that investors don’t need your products. They don’t need your sales pitch. They need your opinion, your experience and the benefit of your knowledge (assuming you have some!).
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DISCLOSURE: THIS ARTICLE IS NOT INTENDED AS INVESTMENT ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. YOU SHOULD DISCUSS THE MERITS OF INDIVIDUAL TYPES OF INVESTMENTS WITH YOUR FINANCIAL ADVISOR. ALL INVESTNG INVOLVES RISK. NO INVESTMENT IS SUITABLE FOR ALL INVESTORS.