Investment Advice: What’s Real and What’s For Sale?

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by Erik Conley

December 9, 2016

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Lyrics from the song “Vasoline” by STP:

One time a thing occurred to me
What’s real and what’s for sale?

Search for things that you can’t see
Going blind, out of reach
Somewhere in the vasoline

Why am I quoting lyrics from a song by Stone Temple Pilots in an article about investment advice? Because the first two lines, which are pretty cool for a rock song, are downright profound for an investor. Think about it… what’s real and what’s for sale? The information you get from your broker, or your financial planner, or a research analyst – is it real, or is it just a sales pitch? This is a key question for any investor. You should always ask yourself this question, every time someone tries to convince you to lay your money down and sign on the dotted line. By some estimates, as much as 90% of the information that’s floating around in cyberspace is bogus. It’s not real, it’s just for sale. If you want to become a better investor, you have to have a well-calibrated B.S. detector, because B.S. is everywhere.
The financial industry actively promotes the notion that investing is so complicated that you shouldn’t even try to do it without professional investment advice and guidance. They flood the financial media with conflicting opinions and contradictory forecasts, and train their sales agents push high-cost products when low-cost index funds would do the job just as well. And don’t count on rules and regulations to keep them honest. The industry lobby is adept at persuading policy makers to pass laws that protect their interests.

Subjective vs. Objective Statements

One way to tell what’s real and what’s for sale is to think about the difference between subjective and objective statements. Subjective statements are opinions, and they’re very different from objective statements. Subjective comments are based on emotion rather than fact. For example, “Without professional guidance, you will probably lose money in the stock market.” Subjectivity provokes an emotional reaction – usually fear – that makes you more susceptible to the sales pitch. Once the salesperson creates a sense of unease in you, he will then offer a product that will make that discomfort go away. Subjective comments are usually biased and unverifiable.
But what is an objective statement? By definition, objective statements contain information can be verified by independent evidence. For example, “A broadly diversified portfolio of stocks and bonds will reduce the risk of your portfolio.” Objectivity is neutral, informative and verifiable.

Some Examples

Sales pitches are notoriously subjective. The following examples show the difference between subjective sales pitches and objective statements of information.

Example 1. Why do I need advice?

Subjective: “Investing is complicated, and the only way to navigate through the confusion is to hire someone who can provide expert investment advice.”

Objective:  “Investing is complicated, but it can be mastered by most people if they take the time to learn about it. Complex issues like estate planning may require an attorney and a tax professional.”

Example 2. Why should I hire you, specifically?

Subjective: “Our investment professionals are the best in the business. They will take care of all your financial concerns.”

Objective:  “Our investment professionals are highly trained. They will work with me to help you meet your financial goals.”

Example 3. How do you get paid?

Subjective: “Don’t worry about my fee. The returns you make from your investments will pay for them.”

Objective:  “I charge an hourly fee for the time I spend working on your account.”

Example 4. How much do you charge?

Subjective: “My fee is a very modest 1.5%, which is deducted from the profits you make on your investments.”

Objective:  “My fee is $200 per hour, paid by you, and I have no other source of revenue from your account.”

Example 5. What will you do for me?

Subjective: “I will create a portfolio solution that is suitable for you.”

Objective:  “I will help you set up a low-cost, well-diversified retirement plan. I will always do what’s in your best interest, not mine.”

Example 6. What kind of returns will I get if I take your advice?

Subjective: “If you invest in the funds I recommend, you will make about 8% per year on average, over the long term.”

Objective:  “Future returns are unknown and unpredictable. There are no guarantees.”

Example 7. What’s the bottom line here?

Subjective: “I can double your money in ten years.”

Objective:  “I can help you build your wealth safely over time, with a low cost, broadly diversified portfolio.”

 

It all comes down to one thing – credibility

The subjective (sales pitch) and objective (factual statements) comparison reveals a clear difference in credibility. If you have ever accepted an invitation for a free dinner that comes with a financial presentation, you undoubtedly recognize one or two of these sales pitches. They are intentionally vague to create a sense of complexity and exploit fears.

Recognizing objective financial information will help protect you from falling for sketchy sales pitches. It is also free of the bells and whistles and promises. Do you really want to invest with self-serving and expensive financial advisers who think that only their proprietary products and investment solutions will make you rich? Probably not.

 

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About the author 

Erik Conley

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.

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