Wealth Influencers – Your Stock Market

This article was originally published for RC Peck’s Fearless Wealth Newsletter in July 2004.

What does it take to manage someone else’s money? This question jumps up for me every time someone tells me about his or her broker or advisor. The person could be telling me good things or bad things, it doesn’t matter—lately, the information hasn’t been that good.

Brokers, and most advisors, are really fancy Wall Street names for sales people. And, although sales person is more appropriate then broker or advisor, I think there is an even more appropriate word to describe them (and it’s not a four letter word). They should be called “wealth influencers,” because that’s what they do. They influence your wealth—for better or for worse.

You go to your “wealth influencer” with a stock, bond, or mutual fund that you like. He or she will say something that will influence your buy, or not buy, decision. And even more common your “wealth influencer” will suggest (read: tell) how you invest.

Let’s say at the end of the year your total portfolio is down 25%? How benign would you say that influencing opinion had been?

Most likely the influence will be toward doing nothing (read: buy and hold… keep your money with me). You’ll be given reasons and statistics to support changing nothing. You might be told, “Hold tight” or “All things considered….” You might even be told that “Over the long run stocks go up.”

If an influencer does mutter those words, you need to run for the hills with your money, because chances are good you’re in the company of a “wealth influencer” who has no idea what is happening in the real world of growing money.

That phrase—“Over the long run stocks go up”—is garbage. Not because it’s wrong but because that statement is useless. I’ll show you why in a second.

I’m convinced the phrase “Stocks go up in the long run” is in the binder the stock brokers get the day they begin their job. I can just picture it, right there in Section One, page 5 of the manual: If your clients want to pull their money out of stocks because you keep losing it, tell them “Stocks go up over the long run.”

So why do I think this saying is dangerous to your wealth? It isn’t that stocks don’t go up over the long run; they do. It’s that this statement is based on a study that was done over a 70-year holding period. Most people aren’t going to buy and hold for 70 years. Some people may not even live 70 years.

Let’s say Joe Public did live 100 years. He would have to invest everything at 15 years old and not take it out until 85. In between those end points stocks would go up and down, but over all they would go up. I don’t know anyone who puts all his or her money into the market at age 15. Most 15 year olds play video games, let alone invest their life savings (which is probably only about $122.87, if they’re lucky).

Yes, stocks do go up over the long run. And people die over the long run too, and the leading cause of divorce is marriage. “Wealth influencers” have to use the Buy and Hold statement because they make their living from keeping your money “under management”. If you pull your money out of the market, how are they going to make their money?

The answer is they won’t make money.  Let us review how ‘wealth influencers’ make money.

1 – The first way is to charge a management fee between 1 to 2% of total funds under management. You give your “wealth influencer” a million bucks and he takes $10,000 to $20,000 a year in management fees whether your account goes up or not!!!

2 – The second way is through other fees. These are likely to show up in the form of “loads” and “12b-1 fees.” A load is a sales commission and a 12b-1 is a marketing commission. You may not know what your additional fees are, so why don’t you ask your “wealth influencer?”

Why would Joe Public pay all these fees? Four reasons:

(1)    He doesn’t know any better
(2)    He still thinks his broker is the greatest
(3)    He’s too scared to learn on his own how money works
(4)    He doesn’t know what his choices and rights are

Here’s the detail. The public doesn’t mind paying these fees when all is well. In fact, I’m willing to bet most relationships were set up between “wealth influencers” and the public during the last bull market.

But I’m amazed by the size of mutual fund loads and 12b-1 fees that the public pays. The mutual fund companies themselves don’t get these sales commissions and 12b-1 fees, the “wealth influencers” get them; it’s the commission paid by the mutual fund companies for the additional money they get to manage. The mutual fund company doesn’t care where the money comes from; they just want more money under their management.

Mutual fund companies sometimes even set up two funds that do the exact same thing, one with a huge load (say 6%) and one with no load. Now the mutual fund company has two revenue channels instead of one; from the “wealth influencers” and from Joe Public. The net result is that the mutual fund company has more money under management, and that means profit for itself.

Enough about mutual fund fees for now, let’s get back to the original question: What does it take to manage someone else’s money?

Does the future “wealth influencer” have to go through years of training? NO. Does the future “wealth influencer” have to be successful at managing his or her own money? NO. Does the future “wealth influencer” have to be out of credit card debt? NO. Does the future “wealth influencer” have to read the 20 best books ever written on markets? NO. Does the “wealth influencer” have to have a passion for helping others? NO. So what does the “wealth influencer” have to do to manage other people’s money? Pass a test, and not a hard one at that.

If a future “wealth influencer” passes a test, he or she gets to influence Joe Public’s money. But, it’s not just his money; it’s his future, his hopes, his dreams, and his kids’ hopes and dreams. And what does the “wealth influencer” have to do to obtain the position? Pass a test. Did I mention you can study and pass the test all in about 30 to 60 days! Doesn’t something seem wrong?

The email below came my way a couple weeks ago. I’ve omitted the person’s name but have not changed the text. This person was “let go” (also known as “getting fired”) because he was an under-performer at his last job. I happen to know this person and think he is well intended, but in my years of acquaintance with him, he never once mentioned anything about investing or managing people’s money. In fact, I happened to talk to this person the week he bought his first stock ever. He bought it at $9, and today you can pick it up for $3.

Here’s the email I got:

“Greetings to all –

Wanted to let you know that my “sabbatical” is officially over and I have new work contact info:

415.XXX.XXXX
XXX@XXXXX.com

A little about the firm:

XXX is a full-service brokerage best known for fixed-income securities.  It’s an 25-year old firm headquartered in San Francisco, with offices in XXX, XXX, and Virginia. 

Once I pass my licensing exams (should take about 2 months), I’ll be a full time Financial Advisor and broker working with individual investors.  I love it – who’d have thought? 

Signed, XXX

I bring up this email and this topic because some how the public has been made to believe that people who manage money know a lot more then you or I do. THEY DON’T! They passed a test. I’ll say it again: All they did was PASS A TEST. Yes, they learned some SEC rules, and what not, but what have they really learned?

Do you think they know how to cut losses? Do they know how to set up the right position sizing for each investment? Do they even know what “position sizing” is? Do they know that the old “buy-and-hold” model is dead? Do they know what a bear market really is and means? Do they understand why Wall Street is still pushing the “buy-and-hold” model? Do they know how to look at a stock in ten seconds and know if it is a loser? Do they know the difference between a good company and a good stock? Do they know how much the markets return when the price chart of a major market is below its 200-day moving average? Do they even know what a moving average is?

These are big questions; ones that your “wealth influencer” should have answers for, based on their own personal experiences and qualifications. Passing a test means nothing. I passed a test when I was 15 years old. It let me drive a car. I didn’t become really good at driving, or understand all the pitfalls, for another ten years, but I passed.

Find out who your “wealth influencer” is and what he or she understands about the markets. And remember, if you are told “Stocks go up over the long haul,” you should run for the hills with your money. The public is getting into [financial] bed with people they know nothing about.

To knowing your rights and growing money,
RC’s Signature

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