There are five investment myths that financial advisors use to gain control of your assets. The advisors combine these myths with finely honed sales tactics to convince you to buy what they are selling.
You should be aware of frequently used investment myths that undermine the achievement of your financial goals. Your increased awareness will help you avoid them when you select financial advisors and make investment decisions.
1. Beat the Market
Financial advisors sell performance because they have to convince you they can produce superior returns (beat the market) to justify the fees they are going to deduct from your investment accounts. They know you will not pay big fees for mediocre results.
Realities: Undocumented sales claims are not a substitute for legitimate track records. There is no evidence that advisors can produce superior returns over longer time periods.
2. Expenses Do Not Matter
Financial advisors don’t like to talk about expenses that impact the amount of money they make. Most often, the higher the expense the bigger the commissions and the more money their companies derive from your assets.
Realities: You may not care about a 2% expense if your performance is +20%. But, what happens if your performance is -20%? Or, what about bond portfolios that produce 5% returns and expenses consume 40% of your return?
3. Recommendations versus Advice
Sales licenses allow reps to recommend investment products that pay them commissions. Investment advisor registrations permit them to provide advice and ongoing services for fees.
Realities: There is a big difference between sales recommendations and financial advice. However, sales reps are very skilled at obscuring the critical differences.
4. Commissions Are Cheaper Than Fees
Some financial advisors are salesmen who are paid 5% commissions to convince you to buy various investment products. Other advisors charge an annual 1% fee for their knowledge, advice and services.
Commission sales reps want you to believe the 1% fee is more expensive than a 5% commission because the fee is continuous and the commission is only paid once.
Realities: This argument is completely false. Advisors charge continuous fees because they provide continuous advice and services. A commission is a one-time payment because the sale of a financial product is a one-time event. There are no continuous services.
5. Back-End Loads are Free
Your advisor sells you a mutual fund that pays him a back-end load (commission). You are told the commission does not matter because the fund family, not you, pays the commission.
This may sound pretty good except for two facts. First, the mutual fund increases the fees it charges you to get back the commissions that were paid to the advisor. And second, the family adds a penalty if you sell the fund in seven years or less. For example, you pay a 7% penalty in year one, a 6% penalty in year two, and so on, until the penalty period finally expires in year seven.
Realities: Back-end loads are traps. The mutual fund’s fees are higher and you cannot sell a bad-performing fund without paying a substantial penalty.