RESTON, VA (Nov. 17, 1999) -- Trust. Trust is great. People need to trust. But, some people need to trust too much. I see it all the time and it worries me.
Trust your spouse, trust your children, trust your doctor, if you wish, but don't trust anyone when it comes to your money. And, yes, that means me and the whole Motley Fool as well.
But especially don't trust anyone who makes their living selling financial services.
Before all you brokers and bankers and advisors start typing angry e-mails, let me add, don't distrust them, either. Financial advisors are just like everybody else, some are motivated by greed, some truly have a desire to help. Some of the greedy ones give their clients excellent advice that makes them both rich, and some of those with the purest motives can bankrupt you. You can't assume anything.
Ever had a mechanic tell you that you didn't need a brake job yet? "You got another six months on those linings," mine said.
I was so shocked that he would turn down work that I trusted him for years and ordered every repair he suggested. He robbed me blind. (Note to mechanics: Of course you're not ALL like that!)
It's amazingly easy to gain someone's trust. Frankly, I would rather trust people too much than be overly suspicious. It's just a nicer way to live. Until it comes to my investments. A few unnecessary car repairs aren't going to break me (he was cute, too), but trusting the wrong investment advisor can break you.
Oh, dear, what's a Fool to do?
First, try (and I know this is not easy) to examine some of your preconceptions about who is trustworthy: People who look you straight in the eye, people who listen sympathetically, people who ask sensitive questions, people who smile a lot. All of those skills can be learned by clever sociopaths who have no interest other than their own bank accounts. And those skills are routinely taught in every sales class. We human beings are programmed to respond positively to those social signals. Most of the time, they work reasonably well, but that social code is easily hacked.
The papers and TV news are full of stories about financial con men who have bilked people for millions. Those aren't the guys I'm worried about. Well, I am, but they really aren't your biggest threat. Those guys are the mass murderers of financial crime. You're much more likely to get taken by the jaywalkers -- people who aren't crooked, they just care more about their commissions than your welfare.
They can't help it. That's the way the financial industry is organized. Brokers get paid when you buy or sell a stock -- not on how well that stock does. Commission-based financial planners get paid a commission when they "sell" you a mutual fund or annuity or life insurance. There is usually no financial incentive to sell you the right thing, the best product for your circumstances. In fact, in many cases the higher commissions come from the more expensive and less productive products.
Say Suzy Wide-eyes invests $10,000 in an underperforming mutual fund with an 8% load. OK, that costs her $800 to get in. Money down the drain. But that's not the end of it. If that fund underperforms the S&P 500, as most of them do, she will "pay" thousands over the decades in lost earnings. If that fund averages 11% to the S&P 500's 12% over the next 25 years (and if it were that close, it would be one of the better performing funds!), that fund will cost Suzy $12,000 compared to what she would have earned in a no-load index fund.
Now, I think most financial professionals truly believe that they are acting in their customers' best interests. But they've been trained to think that, and it's a conviction that, if they want to keep their jobs, they aren't motivated to examine closely. Besides, nobody thinks of himself as the bad guy. What they believe isn't important, though. It's what they do that counts.
I know what you're thinking. You're thinking I've painted myself into a corner here. I've told you that you can't trust the financial professions, you can't trust me, you can't trust The Motley Fool, and you're thinking, heck I KNOW I can't trust myself, and my brother-in-law the day trader just declared bankruptcy, so what do I do? Bury my money in the back yard?
No, of course not. You can't trust the neighbor's dog not to dig it up.
What you have to do is grow up. I don't mean that as an insult. But we all have to recognize that the desire to have someone make decisions for us is childish. Hey, I feel it too. I would LOVE to turn over all my financial decisions to someone who is better at this than I am and whom I could trust absolutely. Of course, I wouldn't admit that I was letting him or her actually make the decision. I would simply consider them an "advisor" -- an advisor whose advise I could take without much thought.
Once the blinders are off and you realize why you automatically trust some people when you have no real reason to, and why you need to trust them, you are in a much, much better position to judge who is trustworthy out there. It might be your local broker or life insurance salesman. Then again, it might not.
If you don't trust yourself to handle your investment decisions (and you may be right -- I wouldn't presume to tell you that you don't know yourself), and if you don't have someone you can trust rationally, at least find a professional whose goals can be aligned with yours. A fee-only financial planner gets paid by the hour, not by what you buy. They may or may not give you good advice, but at least there is no conflict of interest. For really large accounts, there are financial managers who get paid a percentage of your account -- they do well when you do well.
Just don't walk in the door of the nearest financial institution with a sign reading "fleece me" on your back.
Tomorrow we will talk about how to find advisors who are both honest and competent and what to do when they aren't.
Fool on and prosper!