Code Words

Sometimes on a road trip I enjoy scanning through local radio stations as I pass through different areas. It's usually the same old stuff, but sometimes I catch something new. This past Saturday morning I was heading out to volunteer at the Western State Endurance Run. You might have heard of this famous race. It's all on rugged trails up over mountains and down into canyons for 100 miles from Squaw Valley down to Auburn. I hope to run this race someday. It's hard to get into so, until I do, I get to enjoy volunteering instead.

While heading up to the race I was scanning the FM dial when I came across a financial station. I don't normally listen to this kind of programming (I'm more of a KQED guy, actually) but thought I'd linger for a while as I heard a few words that struck a note. As it turned out I ended up listening for maybe an hour. And it was an hour filled with wonder and then frustration.

Wonder and frustration you ask? The radio show reminded me of just how easy it is these days to pull the wool over investor's eyes. It's not that investors are stupid, far from it. It's that investing is so complicated and critically important to so many, that investors are perhaps overly willing to follow the wrong advice if it's presented in the right way. Even with the new (partial) fiduciary rule having gone into effect on June 9th, advisors are still out there directing investors into conflicted and expensive programs, and it continues to be oh-so-hard for investors to get good quality advice.

Financial advice on the radio seems to perpetuate the problem. Most investors are looking for an advisor they can trust, which often means finding someone local they can have a relationship with. And in the case of financial radio, local advisors are often sprinkled in with other nationally syndicated financial programming. These advisors have an implied sense of credibility afforded them by being on the radio in the first place, which is amplified by being sandwiched between programs from the likes of CNBC and Bloomberg, and larger well-known firms like The Motley Fool. This credibility can mask an awful lot of complexity and conflicts of interest. In fact, it can be very hard for the typical investor to tell a show meant to provide meaningful information from one that is essentially an infomercial.

In the case of the show I listened to, the advisor sounded like a nice person, very folksy and caring and knowledgeable. The advisor was talking about transparency, openness, and the importance of planning. These topics are important to me so I listened longer.

The show format was sort of a Q & A with another on-air personality who acted like a facilitator. The first question I heard was regarding Social Security claiming strategies and the advisor went through some standard information about how Social Security benefits work. But then the advisor started talking about why it can be beneficial to start drawing benefits early, and that's where the program went off the rails, in my opinion.

The advisor's point seemed to be that people lose money by waiting to take Social Security benefits. Instead, suggested the advisor, recipients should start taking their benefits early and invest them into something that will grow and be protected. The advisor felt so strongly about this that a Social Security benefit analysis would be provided for free if investors called in and set an appointment. The advisor then spent what seemed an inordinate amount of time repeating the firm's phone number. The rest of the program continued in this vein and the line between useful information and infomercial was blurry at best.

There are certain code words that I always listen for during programs like this. It didn't take long before I heard some of them. Secure, retirement income, financial independence, and asset protection might not sound like much to you, but to me they can mean conflict, complexity, commission, and cost. Whenever I hear those codewords it means the advisor is specializing in selling insurance products (annuities, life insurance, etc) and often expensive and complicated investment management services. I made a mental note to look the firm up when I got back to the office. It turns out the code words continue to be a good indicator.

The advisor giving the folksy and caring advice represents a web of several different companies, including insurance and investment advisory firms. The structure was complicated enough that it took maybe 30 minutes trying to figure it out. For portfolio management, the advisor mostly uses third-party money managers and variable annuity contracts, but still charges a high annual fee of about 2% per year, which, ironically, is being lowered from an obscene 2.75%. And if financial planning is needed (and how could it not be) the firm charges a separate hourly fee.

This radio show was yet another example of how individual investors have the cards stacked against them. With shows like this the advisor has credibility, better training, and controls the flow of information and disclosure (which was, in the context of the program, nonexistent). The investor feels like the advisor is giving good quality objective advice, when in reality there is very little for the investor to base this on.

In theory, the investor could, as I did, review the advisor's website and then review regulatory websites for additional information about the firm. But doing the latter requires knowledge of lots of jargon, how to use the websites, etc. It took me half an hour, but that's because I know what to look for. The individual investor likely wouldn't get to the important information because, as is so often the case, the good stuff is hard to find.

I'll provide some pointers for how to review an advisory firm's website and the regulatory websites in an upcoming post.

Have questions? Ask me. I can help.