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Financial Advisors are not the core problem with mutual funds. No doubt most of them really mean to help. But the Mutual Fund Industry teaches them to do some silly, counterproductive things with your money, things that have you working longer and enjoying life less. Here's the amazing thing about financial advisors: They are, after all, "financial professionals."

The reality is, they don't understand how to grow your money any better than you do. And not only don't they understand, they just don't have the time. They're very busy bringing on new business; so busy, in fact, they don't have the time to really look at what's best for their clients based on their own research. So they use independent rating companies or the Morningstar Style Box, or a 3-5 year on-line view of fund performance as a substitute for real research.

If not, they'll use some sort of software, which is what I call "rear-window-basis software." And if you've ever sat down with a financial advisor, they ask your age, and then in about one minute, somehow they know the exact split to recommend. In 60 seconds or less, the financial advisor will say, "Oh, you need to be in a 60/40 split - split 60% in cash, 40% in bonds."

It takes more than a minute to figure out what is best for a client. There are hopes, there are dreams, there are risks, there are rewards, and there is no way some computer software program can kick out a number to tell me what's best for my client. Just to be clear, this software is ridiculous. It's silly. A software program that knows what's best? Absurd.

But again, it's simple, it's easy, and the financial advisor can push the responsibility off on the rating company or the software they use. Now, I'm not saying whether financial advisors are good people or bad people, I'm simply pointing out that these advisors don't really know how to grow money. Again, it's because of what they're paid to do. They're salespeople. They're not doing deep-value security analysis.

Here's the ultimate silliness: Not having time, the advisors probably do the best they can. So they look to the mutual fund companies and ask, "Hey, what should our clients buy?"

I'm not sure we should be looking to fund companies to ask them what we should buy. It seems like Little Red Riding Hood asking the wolf, "Hey, where do I go for a really good meal?" And she gets there and finds out, of course, that she's the meal. You really should use an objective, unbiased point of view to help with that.

There is another thing that advisors do that is mistaken and horrible for your wealth. If you have an advisor from a publicly traded company, I can just about guarantee that you were told to do this. It's called rebalancing. Rebalancing is typically done at the end of the year. If one of the sectors grew a lot and the others didn't, some of the winnings from that sector are put into the sector that didn't grow that well. What's crazy about this is that that's predicting. You're predicting that the bad sectors or investment will start doing well. I mean, you have to be predicting, or you wouldn't put that extra money in the downturning investments you have.

Predicting is really dangerous. It's also dumb. Think of it: it's 1986, and you put 4% of your portfolio into a company called Microsoft. This grows and grows, and by 1996 it represents 70% of your portfolio. Your portfolio, because you had that huge gainer, has grown way, way faster than the S&P. So your financial advisor says, "Wow, no, that is growing way too fast for you. That is making way too much money for you. We've got to pull the reins in on this. That's getting risky." Only it's not. If you put 4% in an investment and this grows over 10 years and represents 50% or your investment, it's okay. In one sense, you only risk that 4%.

Rebalancing is very dangerous, as this limits your winners and promotes your losers. You can never hit the big numbers if you keep selling your winners like rebalancing would do. So if your financial advisor has suggested rebalancing, you should seriously consider moving somewhere else. I've never met or read about someone that uses rebalancing who's wildly successful in growing and protecting their funds; the ones with mediocre-to-poor returns? I've met plenty of them who do rebalancing.

So why do financial advisors suggest rebalancing? Good question. It must be so they can look like they are working for that 1% you are paying them to grow your money slightly worse than the unmanaged S&P 500 index.

How I can prove most advisors don't know how to grow your money? Go pull up a list of your stock market returns since you started investing and compare them with the returns of the S&P 500 during the same time period. About 99% of you will notice that the unmanaged S&P500 has outperformed.

Relinquishing control of your financial future to a sales person, even one you like, does not work. Look at what has happened to the share price of those institutions. They have not grown their clients' money in a decade.(Ronald Peck)

4 comments

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