Stop the Investing Rip-off E-Book

David B. Loeper

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 303

Veröffentlichungsjahr: 2009

Beschreibung

The Investing Rip-Off How can you tell whether an advisor is conflicted or looking out for your best interests? What questions should you ask when making important investment decisions? How can you select investments that avoid needless expenses and risk? As investors, many of us have put our faith in the financial services industry when it comes to the stewardship of our wealth. Unfortunately, the industry has consistently failed us on this front. The financial services industry--including banks, brokerages, and insurance companies--is unique among all others. Through effective advertising and marketing, it's been able to evade being painted with the brush other underperforming industries have, and in most cases, their well-designed sales pitch has allowed them to effectively prey on the emotional desires of investors. Based on author David Loeper's nearly twenty-five years of experience with this industry's inner workings, Stop the Investing Rip-off reveals the real costs of the investments we make, details the false and misleading information sold to us, and discusses the devastating effects they can have on personal wealth. With this book as your guide, you'll gain invaluable insights into the major segments of the financial services industry, how they spin their offerings, and the questions you need to ask before committing any money to a financial product or service you may be interested in. Filled with in-depth insights and practical advice, Stop the Investing Rip-off sheds much-needed light on the often-unseen aspects of the financial services industry--exposing what¿only insiders know--and shows you how to avoid the conflicts of interest that could compromise your financial well-being.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Preface

The OTHER Millionaire You Make

You Are Your Own Worst Enemy

The Wealthcare Charity Challenge Parlays Warren Buffett’s Million-Dollar Bet

The Other Side

Acknowledgements

Chapter 1 - Major Brokerage Firms

We All Start Somewhere

Are You the Prey of Such a Hunter?

What You Need to Care about When Dealing with Brokers

Why the Firm Isn’t All That Important

Protecting Yourself

Track Records

Don’t Be Fooled

Chapter 2 - Investment Advisers

A Cozy Relationship with You as the Third Wheel

Why You Should Not Judge a Book by Its Cover

Questions You Should Ask of Money Managers

Chapter 3 - Hybrids—Advisory Services Provided through Brokerages

Beware of the Hidden Clause

The Best Test for Adviser Objectivity

Chapter 4 - Discount Brokers

Discount Brokers Are Sales Organizations, Too

Bait and Switch

Buyer Beware—Discount Brokers Encouraging “Churning”

Questions to Ask to Get the Side of the Story You Don’t Hear

Chapter 5 - Financial Planners, Wealth Managers

Peeling the Planner Onion

Verify Registration

Chapter 6 - The Financial Press

“Rule of Rules of Thumb”

Questions to Consider about the Financial Press

Chapter 7 - The Broadcast Media

Expert in Retrospect—Mind Games of Experts

In Bed Together

Chapter 8 - Authors, Self-Help Books, and Financial Celebrities

Financial Authors

Financial Celebrities

Chapter 9 - Mutual Funds and ETFs

Don’t Be Fooled by Fancy Charts

Don’t Be Sold by Magicians

Benchmarking, Star Ratings, and Peer Groups

Chapter 10 - Insurance Agents (and Insurance Companies)

Cut through the Hype

Equity Index Annuities—The Next Auction Rate Note Disaster?

What Is Often Presented about Equity Index Annuities

Raising the Concept of EIAs One Step Higher

A Deeper Look at Why Insurance Companies Offer EIAs

Questions to Ask Insurance Agents

Chapter 11 - Your Company-Endorsed Retirement Plan Adviser

The Main Question to Ask (in Addition to the Questions in Other Chapters)

Chapter 12 - Banks and Trust Companies

Don’t Trust Guarantees

Chapter 13 - Software, Web Sites, and Financial Educators

Avoiding the Numbers Game

Heads or Tails

The Question You Must Ask to Protect Yourself

Chapter 14 - Pitches They All Use to Sacrifice Your Life

Dumbfounded by Questioning

The Fallacy of Risk Tolerance in Setting Asset Allocation

The “Risk Tolerance” Game

False Precision

Be Careful of Making Needless Sacrifices to Your Life

We Have New Information and a New Confidence Level

Preparing for Bad Markets Takes More Than Simulating Them

Chapter 15 - Resources to Protect Yourself

The Root of the Problem

Isn’t There a Law Against This?

Places to Go to Learn the Truth

Conclusion

Appendix A - The Other Millionaire You Make with 2.5 Percent Excess Fees

Appendix B - The Other Millionaire You Make with 1.5 Percent Excess Fees

About the Author

Index

Copyright © 2009 by Financeware, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

eISBN : 978-0-470-48352-7

This book is dedicated to my father, the lateKenneth A. Loeper, who taught me to makesure that no one pushes you around. His passionfor living his life, his ethics and integrity,his strength and empathy taught me thereal meaning of virtue and integrity.I miss you, Dad, and I only wishI could have written thiswhile you were still with us.

Preface

According to the U.S. Department of Commerce, the financial services industry (banks, brokerage, and insurance) represents over 8 percent of the nation’s gross domestic product (GDP). If you think about this, the cost of “these services” is staggering. How can it cost us 8 percent of our total output each year just to manage and service our wealth?

In 2006, the GDP for financial services was nearly $1.1 trillion. (We are excluding real estate from the calculation to focus on banking, brokerage and insurance and exclude home ownership and direct real estate investing which would more than double the figure.) Total U.S. financial assets stood at $44 trillion in 2007, meaning that the financial services industry as a whole is skimming 2.5 percent a year out of everyone’s wealth.

Some of these costs are obvious, like ATM fees, insurance premiums, mutual fund expense ratios, brokerage commissions, or investment advisory fees. Some are hidden or at least require some extreme effort to discover. As I mentioned in my book, Stop the Retirement Rip-off, over 80 percent of people do not know what, if anything, they are paying in fees for their 401(k) plan according to AARP and a study by the Government Accountability Office (GAO). As of this writing, the Labor Department has proposed new rules to correct this problem. We shall see whether actually disclosing these costs becomes law, whether the industry wins with their powerful lobbies, or whether the Labor Department actually ends up enforcing these rules if they become law.

The OTHER Millionaire You Make

Say you and your spouse are 25 years old. You are a teacher and your spouse is a police officer. Your combined incomes are $75,000. Things are tight, but your parents taught you the value of compounding, saving for a rainy day, and retirement. Both of you have retirement plans through your employers with matching contributions, and despite the compromise to your lifestyle, together you defer $5,000 a year to your retirement plans. This is a little less than 7 percent of your income; far below what many advisers and financial gurus would advise with their common rules of thumb. Your employers match some of your contributions, which adds another $2,000 a year to your retirement savings, bringing your total annual retirement savings to $7,000 a year. Both working for the government, your jobs are fairly secure and your incomes will likely adjust for inflation each year along with your savings and matching employer contributions.

The good news is that after 40 years of compromising lifestyle choices to make these savings a priority, at a 7.5 percent return you and your spouse together would have accumulated almost $2.5 million! (The bad news is the effects of inflation are likely to have that $2.5 million only have the spending power of about $760,000 in today’s dollars, but it is still an impressive nest egg for a middle-income family.)

But what about the financial services industry? What did THEY make on the 40 years of compromises to your lifestyle? You accumulated $2.5 million through diligent savings, and if your fees were 2.5 percent as the entire drag of financial services is on the entire wealth of the country, THEY would have made more than $1.7 MILLION on YOUR wealth!!! (See Appendix A.) Does it make sense for the product vendors to accumulate 68 percent of what YOU accumulate? They are not the ones compromising their lifestyle for 40 years. And, even at a more reasonable 1.5 percent fee, you and your spouse would still make them a millionaire (see Appendix B). No wonder the financial services industry is such a large part of our economy.

Think about the impact an extra $1,700,000 or $1 million would make to your life during your retirement. And keep in mind that in this example we are not talking about super-wealthy executives; we are talking about a schoolteacher and a policeman diligently making fairly modest savings over a lifelong career.

The financial services industry is unique among all others. Most people are not fooled by infomercial charlatans (many are, though). They skeptically avoid magic diet pills that come and go with scientific-sounding names and “double blind studies” supposedly backing up their fantastic claims. They avoid miracle products not available in stores or free-for-a-limited-time offers (that require only a small shipping and handling charge). But most of the financial services industry is not really any different. Somehow, the financial industry has been able to evade being painted with the brush other bogus products and services have, and in most cases they have been able to cast their sales spin and outrageous claims in a very different light. Somehow (through effective marketing), they have created a world where the impression in people’s minds is bifurcated—that is, people perceive this industry as sophisticated, smart, and polished, while simultaneously (often more in one’s subconscious) knowing them to be scandalous and justifiably worthy of a very high level of skepticism because deep down, consumers know that they are being sold.

The stakes to your lifestyle are too high to permit yourself to become a victim to well-packaged marketing spin or highly polished sales pitch. Your wealth is the product of your entire life’s productive labor. The profound importance of what your accumulated wealth really represents is a lifetime of compromises, hard work, missed Little League games and recitals. It is the result of seeing the tears in your daughter’s eyes when the critical business trip you took caused you to miss seeing her perform in the school pageant. Your wealth is the result of coping with your son’s anger for missing seeing him pitch his only no-hitter when you had to work overtime. This is not something that should be treated in a cavalier manner. It shouldn’t be based on fiction and coercion through sales spin and product packaging. Your wealth should not be skimmed to make millionaires out of aggressive salespeople with conflicts of interest at the expense of your lifestyle. Seeing those tears or hearing that anger is a huge price to pay, and it should not be dominated by misleading or false marketing that victimizes customers based on ill-founded hopes packaged in a convincing (yet bogus) brochure, advertisement, book or “research” report that tells only half of the story.

Yet financial services (and many areas we will discuss that are not directly considered financial services) seem to focus only on the sale and spin, not on facts, reality, or even disclosure. There are a handful of exceptions to this, of course, but the typical consumer—or even experienced financial adviser, for that matter—cannot discern the difference. This book will explain this other half (the part you never hear, but should if you wish to avoid becoming a victim) of the sales pitches presented each day across the country that contribute to the $1 trillion-plus a year that is often unethically skimmed from our nation’s investment assets.

You Are Your Own Worst Enemy

How did something as important as your lifetime of accumulated wealth become dominated by an industry that is effectively doing the same thing as selling placebo diet pills? Like placebo diet pills, it is a matter of psychology. People are more likely to buy (and pay much more for no true added value other than a false perception) something they want to hear. What is ironic is that the most honest and ethical advisers in the industry are the least successful, at least in terms of building a large profitable practice, because the truth doesn’t sell as well. While as a consumer of financial services you probably think that you want truth, honesty, and ethics (at least from a rational perspective) when it comes to the stewardship of your wealth, the reality is that it is very easy to fall prey to the emotional side of the psychology game that the marketers of financial products and services exploit each day.

The emotional sales and marketing that victimize your wealth and lifestyle abound. Some of the most misleading of these marketing tactics even have the nerve (or lack of ethics?) to position their firm as being the objective, honest segments of the industry.

We all want to be able to win. We want the free lunch and to do better than average. We want to have our cake and eat it, too. We want to outsmart others. We want to “beat the house.” We want to have the system that “works,” that others do not have so we can beat them. We want to have trust in “solid” financial institutions. We want the resources and “expertise” of global firms with billions of assets. We want to be informed of “trends” that we can capitalize on to our advantage. We want to live out our dreams and meet our goals. We want independence to do it ourselves. We want access to tools that “give us an edge” or back-test our investment strategies. We want personalized attention from an experienced adviser who cares. We want a tradition of a long-term investment approach. We want concierge service. We want “proven” long-term records. We want risk control. We want superior returns. We want bullshit.

Our psyche is what enables the marketers of investment services to prey on us. There are the obvious conflicts from brokers and insurance agents that most investors are aware of, yet fall victim to every day. Just scan the headlines to find them: “Firms Fined for Auction Rate Notes Sales Practices”; “Firm Makes Settlement on Sales Practices for Annuities”; “Money Manager Missing in Hedge Fund Scandal for Bankrupt Fund.” There are more subtle violations as well that no one is ever fined for—except you, in the form of the price to your wealth. While the headlines capture the most egregious violations, ethics are not regulated. The result is an industry that usually skates by legally (sometimes crossing the legal line as in the headlines) but unethically gets away with as much as it can, and YOU pay for it.

Take the financial press as an example. While in much of their content their publications will extol the virtues of a truly low-cost and fully diversified indexed portfolio, that is not what you will see blaring in 20-point type on the magazine covers. There is no sex appeal to that, and no emotional strings to pull in your psyche to get you to part with your $4 at the newsstand. Instead, the covers highlight “the top 10 mutual funds you should buy now” or “meeting your financial dreams in three easy steps.”

The broadcast media is even worse. When I released my first book, I had the opportunity to do numerous radio interviews with various financial talk show celebrities. Many of them were nothing more than brokers or product sellers. And just look at financial television broadcasts. Would various financial news networks get many viewers and high ratings if they were not selling those free rides that they promise? Their “secrets” are of course revealed only on your television screen and no one else’s!

Then, you have the “real” financial gurus that are national celebrities and are blared, promoted, and idolized through all of the various forms of media. They have newspaper or magazine columns, web site blogs, books, radio, AND television shows. Clearly, the whole public is becoming super-wealthy by following their “free” advice.

As I write this, I glanced at Yahoo! Finance and noticed the Dow is up 285 points today, along with an advertisement from a newsletter that proclaimed, “Ordinary People Are Getting Rich.” Another ad that circulated through the screen said, “The Next Warren Buffett.” And, finally, one that said, “If you have $500,000 or more, don’t wait to find out if you are making costly investing errors.” I guess if you have less than $500,000 you can afford to wait to find out about making costly investing errors. Doesn’t all of this sound a bit like diet pill claims?

The majority of investors are victims of charlatans, smooth-talking, and good-looking salespeople, or effective advertising and marketing designed to evade reality and prey on emotional desires. I’m not going to claim that I have cracked the code to avoid becoming a poor dad, or a magical means of becoming a rich one for that matter. But what I will expose is how to understand the other side of the major sales pitches from all of the major sources of supposed investment wisdom. You know you should be skeptical of all of those asking you to part with your money for their products and services. Deep down, you know there is a conflict of interest. Your carnival barker peddling his product will not highlight his conflicts, but this book will.

I wrote this book as an advocate of the consumer . . . to expose what I know about the side of the sales pitches that you don’t, but need to, hear. I have nothing to gain with this book other than a clear conscious of exposing questions every investor should ask before they pull the trigger and buy the next book, magazine, mutual fund, or advisory service based on nearly 25 years of experience of seeing the inner workings of the industry.

But wait, aren’t you just trying to sell books, Dave? For this book and all of my other related books (The Four Pillars of Retirement Plans and Stop the Retirement Rip-off both published by John Wiley & Sons, 2009), we received $100,000 in up-front royalties. I am taking all of that and donating it to charity, and using it to challenge firms in each of segment of the industry we expose throughout this book to put their money where their mouth is. If you are selling your value for the price you are charging, then at least have the courage to prove it!

The Wealthcare Charity Challenge Parlays Warren Buffett’s Million-Dollar Bet

In 2008, Warren Buffett made a million-dollar bet with a fund of funds hedge fund that, net of fees, an S&P 500 index fund will beat the expensive hedge fund product over the next 10 years. The winner of the two gets to choose the charity the money will be donated to.

My challenge parlays Buffett’s bet by inviting 20 other firms (including Buffett’s) to put up the same $100,000 I am, for a total of $2.1 million (if they have all have the courage to participate). The rules are simple: Match our donation to a charity of your choosing and make a 10-year bet with us. Manage a portfolio for the next 10 years, available to an investor with $100,000 and priced at your maximum published pricing for that portfolio/service. To make it more realistic and measure results on dollars of wealth accumulated over time like real consumers, the $100,000 will be contributed as $10,000 annual deposits over 10 years, much like you might make in your retirement plan. Each firm we challenge is invited to use all of their wisdom and expertise that they shamelessly advertise and market, and charge all of the fees applicable to an investor with $100,000. The simple benchmark you need to beat will be a portfolio based on the maximum price we charge for our passive index “growth” portfolio available to any participant in our 401(k) platform. If you beat our diversified portfolio over the next 10 years, net of your fees (measured as the account balance at the end of 10 years), we will make up the difference between the two and donate it to your charity. However, if you fall short of our inexpensive passive portfolio, you must make up the difference to us, which will be donated to charity.

The Other Side

I know with fairly high confidence what the results of this challenge will be. It is very likely that some of the firms we challenge will beat our portfolio. It will likely be somewhere between three and nine firms. With the expense drag of the industry’s products, though, it is unlikely that half of the firms will be able to exceed our low-cost, passive, diversified portfolio. But isn’t doing so what they sell? Ten years from now we will find out.

The book is structured in a manner to serve you in two ways. First, if you are a reader, you can follow it cover to cover to see examples of every major segment of financial services, how they spin their offerings, and then learn the conflict of interests they are not disclosing and the questions to ask that would expose them. Reading the book cover to cover would make you a well-informed and justifiably skeptical investor prepared to ask questions that expose whether you are dealing with someone that may meet the hurdle of being “legal” yet fail the test of ethics, knowledge, and/or integrity.

Alternatively, if you are not one to sit down and read this entire book, keep it on your shelf as a ready reference whenever you hear a financial services sales pitch. The chapters are organized by the type of vendor and then by the type of sales pitch you might hear from them, which enables you to skip right to the appropriate chapter to get the questions you need to ask before you become victimized by the sales pitch.

Acknowledgments

Writing acknowledgments, to me, is perhaps the hardest thing to write, because we are a product of all of the people we know. How do you thank everyone who has helped make you who you are? Of course, I need to thank all the people of Financeware, Inc., who have each made a contribution to this book, either directly or indirectly. We have a great team of people who truly care about helping people making the most of their lives, and they do so with unbridled passion. They live as role models for others by consistently acting with unquestioning integrity. George, Jerry, Christopher, Brandy, TJ, Elliott, Joe, Will, Jeremy, Bill, and, of course, my executive committee partners, Bob and Karen, have all made huge direct contributions to this book. Thank you all for your patience, objectivity, and coaching and for understanding how to help us to help others.

Of course, I have to thank all of my former associates from my “Wheat First” days who are now, or were, part of Wachovia Securities (soon to be Wells Fargo). These associates had the courage to challenge conventional wisdom and risk being different to serve clients better. I have to credit Dave Monday, Mark Staples, Danny Ludeman, Jim Donley, Marshall Wishnack, and, of course, the late James Wheat, a blind man who had more vision than all of us put together. Respect should be earned, not given, and every one of these people have earned mine. I consider each of them a hero in his own way.

There are a handful of people in the industry I have to thank because they, too, have truly earned my respect by their actions and courage. People like Len Reinhart, Frank Campanale, Ron Surz, and the late Don Tabone have all contributed greatly to my knowledge, and their willingness to have rational debate on numerous topics has helped me immensely.

I have to thank my late father, Kenneth A. Loeper, for teaching me “not to let anyone push me around.” Without that skill ingrained in my brain, I would have never had the courage to face the attacks of the industry groups that hate having their apple cart upset. Also, my mother, Anna, for teaching me that the biggest responsibility we have in raising children is teaching them to be respectable people of integrity who can take care of themselves.

Finally, I want to thank the late Ayn Rand. Whether you like her or not, you have to respect her passion for and vision of a hero or heroine, so often demonstrated in her novels. The abstracts of her concepts, living a moral life and acting with integrity, helped me to understand and express why I am what I am. Who is John Galt?

1

Major Brokerage Firms

When you think of Wall Street, what names come to mind? Depending on where you live, the answer might be different. If you are in Milwaukee, Wisconsin, you might think of Robert W. Baird & Company. If you live in Philadelphia, you might think of Janney Montgomery Scott. In Tampa, you would probably think of Raymond James. In many regards, these firms that are not head-quartered in New York are just smaller versions of the Wall Street giants like Morgan Stanley, Smith Barney, and Goldman Sachs. Regardless of their size or the location of their headquarters, most firms offer investors a comparable array of products and services. Each is literally a financial supermarket chain of investment products and services ranging from stock and bond transactions to insurance and annuities, cash management accounts, trust services, financial planning, discretionary portfolio management, mutual funds, alternative investments, and even lending services. For fairly large firms with access to nearly anything the financial services industry has to offer, many of the topics covered in this book will apply some of the time to any of these firms depending on the product or service the broker (the industry prefers to call brokers “financial advisers”) is selling you.

I worked in that industry for over 15 years, first as one of those brokers, then moving up the ranks of management running various departments and divisions, and ultimately reporting to the vice chairman of a major firm as managing director of strategic planning. I’ve seen the training brokers received. I’ve seen how brokers are recruited away from competing firms. I’ve seen the sales contests where brokers could win trips for generating commissions, and I have even had the opportunity to go on some of those luxurious trips. I’ve seen how the compliance departments implement policies to monitor the actions of brokers to attempt to stay within the laws. I’ve testified in arbitration cases clients brought against the firm where the client felt the broker harmed him.

On the surface, all of these firms on some level want to do a good job for their clients. This intent is proudly professed on television commercials, brochures, and marketing literature: One client at a time . . . Independent advisers with the freedom to serve their clients’ interests . . . We always put our clients’ interests first . . . The knowledge and experience of a global investment firm . . . A 100-year tradition of serving our clients to meet their goals . . . The resources and experience to weather difficult times . . . all slogan concepts you may have heard from any of these firms.

But you need to understand one thing that is disclosed to you in fine print in your agreement with the firm (well, two things if you consider that you are binding yourself to arbitration instead of the courts). Your account agreement will say:

Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time” (emphasis added).

There you have it, admitted to you in writing, which is Exhibit One in any arbitration case you might bring against the firm for not putting your interests first. Despite the brochures and television ads that would have you believe otherwise, when it comes time to sign the account agreement, you are acknowledging that their “financial advisers” are not advisers, but instead are salespeople with conflicts of interest that may not be the same as yours and are getting paid based on the product sold.

Now, being large supermarkets of financial stuff, these firms also offer advisory services that require a higher standard of fiduciary responsibility to you and serving your best interests. This hybrid model of being both a broker salesperson and offering a fiduciary service is covered in Chapter 3. This chapter will focus on the makeup of these firms, a bit of the history, and some disclosure of the conflicts of interests that you probably do not know enough to ask about so you get the other side of the story that you need to know when dealing with someone that is acting as a broker.

We All Start Somewhere

Have you ever wondered what it takes to get a job as a broker? From what is marketed by the firms, you might think that a deep understanding of financial markets; advanced degrees in finance or accounting; and a keen, objective, yet skeptical mind would be the sort of skills that would be required. That’s not even close. Clearly, there are some brokers that have these skills, but they are the exception, not the rule. Broker trainees are normally hired mostly for one trait—sales skills. And there are not many people who have the type of sales skills needed to become successful brokers. To be a broker, you need to be able to bring clients in. You need a thick skin to deal with rejection. You need to know how to network with the right people to get introductions to others who could be potential clients.

Some sales jobs require deep product knowledge to be successful; the brokerage industry in general is not one of them. There are a lot of people with those sales skills who study and deeply understand the products they are selling in numerous sales positions. But, in the brokerage industry, deep product knowledge is not a key to success as a broker. The type of salespeople that might be successful in some sales jobs (those that have the initiative to get a deep understanding of product knowledge) may lack the “hunting” skill needed to bring clients into a brokerage firm. This “hunting” skill is what makes a broker successful or unemployed. Its relative rarity and the value it brings to firms for the distribution of their products is why brokers are so highly compensated. In major firms, few will remain employed if their earnings from the commissions generated are less than $100,000 (which means they must generally produce more than $285,000 in revenues to their firm for this level of earnings). The average in some large firms is almost double that, and some of the top “producers,” as they are known, earn several million a year.

Despite all of the advertising you see from firms, little of it does anything to directly bring clients to the firm. Most financial services advertising isn’t meant to bring clients in, but instead to create an image or brand of the firm; in many cases, it is meant to target the brokers who are out there hunting for new clients instead of the consumers themselves.

Contrast this to the advertising in your Sunday newspaper. The flyer from Best Buy isn’t so much designed to create a brand image around the Best Buy firm so their salespeople can cold call or network to bring in new clients to buy the latest flat-panel television. The ads Best Buy runs are designed to get people into the store now to buy products that are on sale. The Best Buy salespeople (hopefully) are trained and knowledgeable about those products and how to sell add-on things like accessories and expensive extended warranties on the products to increase Best Buy’s profits. There is a huge difference in these sales skills versus the broker who needs to hunt down new clients. The Best Buy salesperson stands behind the counter waiting for the firm to bring customers into the store for them to sell something. In brokerage firms, it is the exact opposite. The firm stands behind the counter with a selection of products offered to advisers for them to sell when they hunt down prospects.

You don’t see financial firms advertising “Sale! Limited quantity! This weekend only! Save 20 percent in management fees on Acme Balanced Fund!” with the sure-to-follow line of customers waiting outside the brokerage firm’s office to get the sale price two hours before they open. The ads firms run do not have customers rushing in, and since a broker is not on salary and doesn’t earn anything unless he or she brings customers (and commissions) in, the main skill they need is to hunt down clients. Their survival is dependent on it.

Are You the Prey of Such a Hunter?

Before the cold-calling rules were in place, the typical broker trainee would spend countless hours on the phone. Many branch managers supervising their trainees would start them on their first day with a telephone, a phone book, a sales script for some product, and let them have at it. They also may have had a “quote machine.”

Don’t get me wrong—brokers receive some training. They normally have to pass Series 7, along with a couple of other exams. These exams, though, are not focused much on financial education per se, but more on the laws they must comply with and the basics of how different financial products are structured. There is also normally a several-month apprentice period where they are not allowed to sell to the public. Their training outside of the industry exams, however, is normally focused on sales skills and how to build a “book” of clients.

Broker training often is focused around how to sell a financial product. Trainees are not normally encouraged to deeply learn all of the products, but instead choose some they are comfortable with presenting, and then contacting as many people as possible about them. If you think about this, it should be somewhat obvious to you that if you are getting pitched a financial product, it may not be in your best interest or even remotely connected to your financial goals. To the salesperson, this makes no difference, especially at the beginning of their career. It merely needs to be defensible as something that could be deemed “suitable” for you. There are not many products sold by brokers that could not be positioned as being suitable for anyone.

What is ironic to me about this is the contrast of how these hunters of client prey sometimes grow to a higher level of professionalism than merely hawking a handful of products to people for which they have become comfortable with the sales presentation. The firms employing these advisers really, and sincerely, ultimately do not want them to just peddle a bunch of investments to an endless list of new prospects their broker hunters prey upon. They want these brokers to grow into the role of being your primary financial adviser, not just someone that sold you something three years ago like a balanced mutual fund or a municipal bond. There are some very good reasons for this.