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The Problem with the Industry: Unqualified Advisors and Poor Investment Choices

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I'm a tax attorney, so I see a lot of other people's finances.

The ones I see that work with a financial advisor are, without exception, paying at least 1% of AUM in fees to be in higher-costs funds that underperform the index funds in the long run. To make matters worse, the financial advisors choose tax-inefficient funds and take their fees in the most tax-inefficient way possible. I have also found that many do not understand the nuances of self employed retirement plans or the backdoor Roth.

In my view, there are a few problems with the industry. First, most financial firms hire salespeople and then teach them finance, instead of hiring people who already know finance. I know a LOT of morons working in Edward Jones shops and the like, who are charming but ultimately don't understand the back end of the products they sell. My ex worked for two of the large regional banks in my area, and she had a degree in communications.

She knew (and knows) nothing about finance, but instead was hired because her family is wealthy and gets referral business from old neighbors and classmates. She couldn't even pass the Series 7, but the banks thought she could work in trust management. I talk to clients and financial advisors all the time who don't understand the difference in tax efficiency between mutual funds and ETFs, or the mechanics and reasons of a 1031 exchange, or what the tax incentives actually look like in various types of accounts, or the merits of a solo 401k vs a SEP IRA.

When you only have a hammer, everything starts to look like a nail. Second, the incentives are rarely aligned in the middle of the market or below. Helping a 24 year old set up and fund their Roth IRA is probably not worth your time on the front end unless you're getting an outsized commissions, which ultimately cost the client more money than needed for someone with a small account.

ISSUES
Conflicts of Interest
Deceptive Practices
Incorrect Advice

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Both of my parents saved their money with one of the giants in this field (as tempting as it is, I will not name them). When you visit their offices, there is lots of polished wood, hushed tones, and big conference rooms as they very seriously do their job of turning the assets entrusted to them into more money.

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When it was time to unwind her accounts, she was diversified to the point of “diworsification." There was no rhyme or reason for what she was invested in. It was as if the plan was to see if there was a possibility to buy a little bit of everything. She was in every high-load mutual institutional fund you could possibly find, and a smattering of international institutional funds as well. What a mess.

They wanted to hand this over to the heirs as-is and not sell any of it. I insisted they cash all of this mess out and only transfer the money to the heirs. They did this for everything except her IRA, which they transferred as-is. I received $13,000 (give or take) worth of 20 different mutual funds. That’s just nuts.

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