In case it isn’t clear, it was the investor who had to pay for these “team-building” exercises. That means MERs (Management Expense Ratios – the annual costs charged to run a mutual fund) were higher.

But a strange thing happened in the late 90’s. Fund companies couldn’t do this sort of thing anymore (someone figured out this stuff was wrong!). Now an advisor has to fill out a co-op request form that is approved by compliance departments for any expenses a fund company pays for, and this is usually limited to hosting seminars and mail-drops.

So “team-building” budgets were essentially abolished, yet MERs aren’t that much lower. But fund company profit margins are higher.

So – do you still think they are looking after YOUR best interests? Time to wake up and smell the coffee.

Mutual funds that are sold on a DSC basis, or rear-load or back-end load, pay your advisor an up front commission. Call it 5% up-front with a 0.50% annual servicing fee that they would collect forever. These back-end load units will normally have what are called “redemption fees” which means you are charged a penalty to sell them within the first 7 years. For people who require an income stream, the fund companies created a 10% fee-free rule where 10% of any units become available to be redeemed every year without incurring a penalty. But what sneaky advisors do is take these fee-free units and convert them into front-end units or no-load units which pay a higher service fee of 1.00% per year for clients who don’t need an income.

That means your advisor gets the higher up-front commission, but then coverts the units over time into units that pay a much higher service fee. If there weren’t allowed to do this, than MERs would be lower across the board (by about 0.50%).

I knew that beating up advisors would eventually get me into big trouble, so I bought a punching bag and put my old advisor’s picture on it. Great way to relieve stress!

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Whenever you see a mutual fund manager on TV giving you advice, they certainly tell a nice story, they sound very educated and researched. But their pay is usually a percentage of the assets managed by the fund. Their goal is to get you to invest in their fund. The more assets they get, the more their pay is.

It’s similar to all those option trading seminars out there that promise to show you how to outsmart the market. If those systems really worked no-one would give away the secret to making billions for only a few hundred dollars. Besides, the more people who know the secrets, the less likely the secret will continue to work.

Look into index funds.

For anyone foolish enough to think otherwise, consider that fund companies spend lots of time and effort lobbying regulators for their own interests, but no time and energy is spent trying to adjust this disclaimer. The reason? 100% of data supports the disclaimer – and they know it.

You would actually be better off picking your investments by throwing darts. While you’re at it, see if your advisor will hold the dartboard up for you.

Well, that’s Superbad Advice.

If you put all the active managers together the net result IS the market, which is what the ETF is simply tracking. So the other way of looking at it is to see it as benefiting from the wisdom of ALL active managers put together. Except at a big discount.

Feel better?

One of the first warning signs that an advisor is not being completely forthright with you is how he or she reacts when you ask them how much they make. Just ask them what their income before taxes was last year and then sit back and watch. Normal people will answer that question with a number. A financial advisor will usually launch into a story. This is a warning sign.

One of the reasons they may not be upfront with you is that they are ashamed of making so much money for doing so little. This isn’t true of all advisors, but probably 90%.

Considering you have to give them all your financial details, you should feel free to ask them theirs. It’s a two way relationship after all… isn’t it?

If I put that money aside for him and it gets an 8% return between now and when he turns 65 it works out to just a touch over $2 million. (After inflation we’ll call that $1 million in today’s dollars and we’ll forget tax drag for now, but that’s another story.)

For this to be better for him some might just wonder if he’ll make more than $2 million divided by 35 years (30 to age 65) per year more than he would’ve if he had not gotten his MBA. This is another $57,000 per year averaged out. (It would be markedly less if invested). The reason this line of thinking doesn’t work is that he’ll just spend the increased pay instead of saving it.

Unfortunately, it takes an MBA for most students to realize that an MBA isn’t worth it anymore. Why? The conventional wisdom is Superbad Advice. If you were planning on paying for your kid’s post-secondary education, don’t. Put it away for them and don’t tell ‘em. Besides another year of kids being taught that being 80% right is good enough doesn’t cut it in our world anymore. Too competitive.

When one of my sons was 11 years old, I made him take that same course and gave him a month to study. He passed too. Consider yourselves forewarned. 90% of financial advisors are just salespeople, nothing more. If the majority are compensated on commissions, how can they be expected to be free of conflicts of interest? Oh, wait. They can’t.

Whoever decided advisors only need a four week, self-study course to be licensed to manage people’s financial futures gets 50 lashes with a steamed carrot. Boo on you. That was Superbad Advice.