Featured in the Knoxville News Sentinel: August 29, 2018
Recently, a friend asked me to review a sales pitch for an alternative investment product. As he repeated the “Financial Adviser” sales terminology, I cringed. Any time I hear words like “guaranteed” or “low risk” in the same sentence as “up to 8 percent return,” my warning radar comes on. Don’t be the mark in the room – or free steak dinner meeting as it were.
The Turkish market approach
This broker’s (sorry, “Adviser’s”) mentality is as old as a Turkish market: How can I get you to buy something?
Last fall, I met with a concerned couple working with a different adviser who lost $250,000 in a similar investment product – it was most of the couple’s savings. The deal went bankrupt, lawsuits are pending. There wasn’t anything I could do to remedy their situation.
Nonetheless, the sales economy must be doing well for these product brokers as my mailbox keeps getting more and new invitations to free steak dinners where I can learn how to protect my money and achieve better returns. The sheer number and frequency of these invites tell me that people will suspend critical thinking to get a free $30 sirloin.
The underlying common themes of these sales pitches is the fear of losing money, finding guarantees, and learning the keys to above-average returns expressed as enticing numbers (ex: 4 percent, 8 percent) with minimal risk. It’s sales psychology 101.
Thank goodness for FDIC insurance
Let’s get real, even a Certificate of Deposit is considered low risk until the issuing bank fails (then we thank God for FDIC insurance). These more off-the-beaten-path investment vehicles may perform well until they don’t (see 2000-2002 and 2007-2009 crashes in the markets and economy).
The “guarantees” of investment returns or return of your capital still depend on the company’s ability to stay afloat and meet their commitments. You reduce the risk with a thoroughly vetted company, but you do not eliminate it.
So, there is always a link between risk and return. Potentially higher returns indicate higher potential risk – reminds me of the old saying, “there is no free lunch on Wall Street.” I would read the fine print, understand the worst case scenario, confirm the guarantees and risks, understand a product’s liquidity or lack thereof, and be comfortable with how the broker is paid.
Replace sales with science. Let evidence and research drive your investment decisions – there are no shortcuts. This is your hard-earned money.
Caveat emptor
I hate to say it, but caveat emptor, buyer beware. Financial advisors, wealth managers, financial consultants – it is hard to distinguish the salespeople from the real financial planners and investment advisers (“er”). At a minimum, for those selling commissioned products, securities or insurance licensure is legally required. For anyone claiming to dispense financial advice, evidence of training, reputable credentialing, experience, etc., these are the pillars of a true advisory professional. To be clear, we all need financial products, and people to sell them! But to conflate the two, advice and products, is either disingenuous, denial, or potentially devious.
