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Another One Bites the Dust

fiduciary Mar 28, 2018

We try hard not to do it, but sometimes it can’t be helped. Super-boring words like fiduciary duty, rebalancing, managed account, universal life insurance, and many other terms that are second nature to an advisor. For a client, this feels like trying to stay awake during high school science class, or the end of the last Lord of the Rings movie.

Let’s talk about a few other words that might put you to sleep: proprietary products, robo-advisors, and hypocrites.

Wait, how did that last one sneak in there? It’s there because hypocrisy is never far behind when we are talking about the investment business. Let’s walk through what these words mean, and why anyone who cares about their money should be paying attention.

Proprietary Products
Let’s say it’s time to paint your house, so you walk into a home improvement store to pick out your favorite color. You can either get the color you want from a well-known paint brand, or the national home improvement brand also has it’s own line of paint products and can make the color. Any guesses which one is more likely to be recommended? Do you feel confident that if the store’s own brand peeled off of your house after a year they would let you know that up front?

Of course not, and the hidden agenda is no different in the investment business. These are what we call “proprietary products.” Any independent financial planner with a conscience will stay away from these types of products, as they create continual conflicts of interest when making recommendations.

If you haven’t heard of rob-advisors, perhaps you just aren’t hip enough. I will let Wikipedia explain them:

Robo-advisors or Robo-advisers are a class of financial adviser that provide financial advice or Investment management online with moderate to minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms.
Robo-advisors have brought a lot of competition and positive changes to the investment industry. Fees are coming down, transparency is going up, and the technology available to financial planners like myself has finally entered the 21st century.

These are welcome changes, but the underlying problem with your finances is not how investments are managed, it’s how you manage your spending. The technology to make you care less about today and more about tomorrow are still under development, apparently.

I’ll use it in a sentence just to make sure we are all on the page. “I asked my nephew Hunter who works at this tech startup in the industrial district where I should invest, and he said to avoid paying anyone, and use a robo-advisor, since they don’t have the same conflicts.” Oh, Hunter, he loves robo-advisors and avocado toast.

One of the better-known robo-advisors is called Wealthfront. When they aren’t busy saying your fees are way too high (and they aren’t wrong), they usually bash Wall Street and the financial services industry in general. My kind of people! This is technology I can finally get on board with. Here are a couple of lines from a recent blog post from the founder:

Since founding Wealthfront I have learned a lot about how investment firms are compensated — and I must say it’s very disappointing…But we believe you deserve the truth from your financial advisor, which is why we are dedicated to complete transparency — and no kickbacks.

Even though most robo-advisors make a living selling the idea that you don’t need a human advisor, we have always been kindred spirits. The fight against excessive fees, conflicts of interest, and “advisors” who don’t have the first clue what they are doing is always looking for new voices, and companies like Wealthfront and Betterment (another robo) have been welcome additions.

That is why it is so disappointing to learn that Wealthftont will be launching a mutual fund (this means creating their own proprietary product). It’s like Gollum in the Lord of the Rings: everyone enters the business with the purest of intentions, but at some point can’t resist selling you out for an easy buck.

Let’s go back to the blog post from Wealthfront’s founder:

But we believe you deserve the truth from your financial advisor, which is why we are dedicated to complete transparency — and no kickbacks.

Now let’s go to their disclosure document available on the SEC’s website:

Wealthfront’s investment plan also includes an allocation to the Wealthfront Risk Parity Fund, a proprietary mutual fund…Investment in the Wealthfront Risk Parity Fund is subject to an annual fee of 0.50%.

How is this not a kickback? They are going to direct a portion of your money into an investment where they will make additional revenue, and you will not be able to see that fee on your statement!

What an absolute joke. In the Fall, Wealthfront is lecturing us on the evils of Wall Street, kickbacks, and misaligned incentives, all while they are developing a proprietary fund to put in your account by default.

Financial advisors deserve to have a bad reputation at this point given all of the ways money disappears from your account in the process. If you think that technology-based companies that don’t use human advisors should be exempt from this equation, it’s time to think again. Wealthfront’s proprietary sneak attack is only the first conflict that we know of, and there are sure to be more.

As far as your financial future goes, you don’t have to put up with these conflicts. I don’t make one penny off of a client’s investment account that you don’t see on a monthly statement. And this is hardly unique. There are thousands of independent financial planners without these conflicts; you just need to educate yourself on how to find them.

If it is the safe delivery of that all-important ring you are after, your Frodo is out there. These planners are educated, certified, competent, and available for a reasonable fee. The only downside to searching for one that is right for you, however, is they may not be cool enough to make Lord of the Rings analogies. I guess you really can’t have it all.

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