MONEY Master the Game: 7 Simple Steps to Financial Freedom (21 page)

THE CHEF DOESN’T EAT HIS OWN COOKING

We are continually sold and influenced by those who “do as I say, not as I do.” In a sobering 2009 study released by Morningstar, in tracking over
4,300 actively managed mutual funds,
it was found that 49% of the managers owned no shares in the fund they manage.
That’s right. The chef doesn’t eat his own cooking.

Of the remaining 51%, most own a token amount of their funds when compared with their compensation and total net worth. Remember, these guys earn millions, sometimes tens of millions, for their skills:

• 2,126 own no shares in the fund they manage.

• 159 managers had invested between $1 and $10,000 in their own fund.

• 393 managers invested between $10,001 and $50,000.

• 285 managers invested between $50,001 and $100,000.

• 679 managers invested between $100,001 and $500,000.

• 197 managers invested between $500,001 and $999,999.

• 413 managers invested more than $1 million.

So the obvious question is, if the people who manage the fund aren’t investing in the fund they run, why in the world would I? Good question!!!

The chef doesn’t eat his own cooking if the ingredients are bad or if he knows what the kitchen
really
looks and smells like. These fund managers are smart—they work under the hood.

WHERE ARE THE CUSTOMERS’ YACHTS?

Fred Schwed Jr. was a professional trader who quit Wall Street after losing a lot of his money in the crash of 1929. In 1940 he wrote the investment classic
Where Are the Customers’ Yachts?, or A Good Hard Look at Wall Street.
The joke behind the title has been retold many different ways over the years, but in Schwed’s version, a successful Wall Street broker named William Travers is admiring the many beautiful yachts while on vacation in Newport, Rhode Island. Each yacht he inquires about happens to belong to a broker, banker, or trader.

He asks, “Where are the customers’ yachts?”

Nearly 75 years have passed since this story was first published, but it could have been written yesterday!

WHOM TO TRUST

We have all seen numerous variations of the same commercial. The husband and wife, looking concerned, sit across the desk from their financial advisor. And with the wisdom of a grandfather and the look of a man who has weathered many storms, the hired actor assures them that with his help, they will be just fine. “Don’t worry, we’ve got your back. We’ll get your kids through college. We’ll get you that sailboat. We’ll get you that vacation home.” The insinuation is loud and clear: “Your goals are our goals. We’re here to help.” But the real question is:

Are your interests
really
aligned?

Does the person with whom you trust to plan you and your family’s future have every incentive to operate in your best interest? Most would think “yes”—and most would be wrong. And the answer to this question may be the difference between failing or succeeding in your journey to Financial Freedom. When climbing the mountain, how would you feel if your guide was more concerned about his own survival than yours? As David Swensen reminded me, “Your broker is not your friend.”

THE SUITABILITY STANDARD

And here is the truth: the financial services industry has many caring people of the highest integrity who truly want to do what’s in the best interest of their clients. Unfortunately, many are operating in a “closed-circuit” environment in which the tools at their disposal are preengineered to be in the best interests of the “house.” The system is designed to reward them for selling, not for providing conflict-free advice. And the product or fund they sell you doesn’t necessarily have to be the best available, or even in your best interest.
By legal definition, all they have to do is provide you with a product that is “suitable.”

What kind of standard is “suitable”? Do you want a suitable partner for life? “Honey, how was it for you tonight?” “Eh . . . the sex was suitable.” Are you going to be promoted for doing suitable work? Do you fly the airline with a “suitable” safety record? Or better yet, “Let’s go to lunch here; I hear the food is suitable.”

Yet, according to David Karp, a registered investment advisor, the suitability standard essentially says, “It doesn’t matter who benefits more, the client or advisor. As long as an investment is suitable [meets the general direction of your goals and objectives] at the time it was placed for the client, the advisor is held free of liability.”

THE GOLD STANDARD

To receive conflict-free advice, we must align ourselves with a
fiduciary.
A fiduciary is a legal standard adopted by a relatively small but growing segment of independent financial professionals who have abandoned their big-box firms, relinquished their broker status, and made the decision to become a registered investment advisor. These professionals get paid for financial advice and, by law, must remove any potential conflicts of interest (or, at a minimum, disclose them) and put the client’s needs above their own.

By way of example, if a registered investment advisor tells a client to buy IBM and later that day he buys IBM in his own personal account for a better price, he
must
give the client his stock at the lower price trade.

Imagine having investment advice where you knew that the law protected you from your advisor steering you in a specific direction or to a specific fund to make more money off of you.

One huge additional advantage? The fee you pay a fiduciary for advice may be tax deductible, depending on your tax bracket. So a 1% advisory fee could really be closer to 0.5% when you take into account the deduction. Contrast this with the 2% or more you pay to a mutual fund manager,
none
of which is tax deductible.

FINDING A FIDUCIARY

If there is one single step you can take today to solidify your position as insider, it’s to align yourself with a fiduciary; an independent registered investment advisor (RIA for short).

Most people I ask don’t know whether “their investment guy/gal” is a broker or a legal fiduciary, but nearly everyone believes that his investment person should have his best interests at heart. And as I mentioned before, they typically do have his clients’ interests in mind but they are operating within a framework that rewards them for selling. And, by the way, you’ll never hear them referred to as “brokers.” They are called registered
representatives, financial advisors, wealth advisors, vice president of this, that, or the other thing. In fact, the
Wall Street Journal
reported finding in excess of two hundred different professional designations for financial advisors—more than half of which are not tracked by the Financial Industry Regulatory Authority (FINRA), which oversees how investments are pitched to investors. Many of these financial service “credentials” are pure window dressing and do not impart a fiduciary duty.

NOT ALL ADVICE IS GOOD ADVICE

Aligning yourself with a fiduciary is, by all accounts, a great place to start. But this does not necessarily mean that the professional you select is going to provide good or even fairly priced advice. And like any industry, not all professionals have equal skill or experience. In fact, 46% of financial planners have no retirement plan! That’s right. The cobbler’s kid has no shoes! Over 2,400 financial planners were surveyed anonymously in a 2013 study by the Financial Planning Association, and close to half don’t practice what they preach. Heck, I can’t believe they admitted it!!! Truth is, we are living in uncharted territory. With endless complexity, central banks printing money like crazy, and even some governments defaulting on their own debt, only the elite advisors of the planning industry know how to navigate these waters.

THE BUTCHER AND THE DIETITIAN

A good friend of mine recently forwarded me a YouTube video entitled
The Butcher vs. the Dietitian,
a two-minute cartoon that effectively and succinctly highlighted the major difference between a broker and a legal fiduciary. The video made the glaringly obvious point that when you walk into a butcher shop, you are
always
encouraged to buy meat. Ask a butcher what’s for dinner, and the answer is always “
Meat
!” But a dietitian, on the other hand, will advise you to eat what’s best for your health. She has no interest in selling you meat if fish is better for you. Brokers are butchers, while fiduciaries are dietitians. They have no “dog in the race” to sell you a specific product or fund. This simple distinction gives you a position of power! Insiders know the difference.

I did a little digging, and the man behind the video was Elliot Weissbluth, a former litigator who 15 years ago became incensed by the conflicts of interest in the investment industry and made it his mission to provide an alternative to the brightest and most successful advisors and independent firms. In other words, choosing independence should not mean a sacrifice in sophistication and access to the best solutions. His great idea caught fire, and HighTower is now one of the largest independent registered investment advisors in the country, with nearly $30 billion in assets and 13th on
Inc.
magazine’s list of fastest-growing companies. The explosive growth of HighTower shows that clients want a dietitian. They are sick of being sold meat and then realizing that their health is in jeopardy.

I interviewed Elliot for this book and we have since developed a great friendship. I didn’t have to twist Elliot’s arm to leave frigid Chicago and join me for a day of 78-degree weather at my home in Palm Beach.

AN AUDACIOUS PROPOSAL

Together we sat on my back lawn overlooking the ocean and had a long conversation about the myths being marketed and injustices being done to the average investor. Elliot has a unique passion, a fervency, to serve investors by eliminating the self-interest and inherent conflicts that have become the norm in big firms. From Day One, he made the commitment to full disclosure, full transparency, and conflict-free advice in every aspect of the business. And by not accepting payments or kickbacks for selling a product or service, his firm stands in a position of true power and integrity. Firms compete to work with HighTower, and all of the benefits are passed down to the client. What’s really powerful is how Elliot grew the business. First, he built a unique platform that no one thought was possible. Then he recruited the best “corner office” advisors from the biggest firms and gave them the path to the moral high ground—the opportunity to quit working for the house and work
only
for the client. And by giving them the freedom not to have to serve two masters, they could do whatever was in the client’s best interest, at all times, in all transactions.

There was only one problem:

HighTower was built to service only the wealthiest Americans.

In fact,
all
of the top advisors in the industry are focused on the wealthy. Makes sense, right? If you manage money, you want to manage fewer clients
who have more money. This arrangement maximizes your own profitability. Too many small accounts means lots of overhead and cost. It’s just not an efficient way to do business.

In spite of all that, I decided to drop a challenge on Elliot . . .

LET’S BLAZE A TRAIL

“Elliot, I want you to figure out a way to deliver the same fully transparent, conflict-free advice to anyone who wants the service, not just the wealthy. There has to be a way, Elliot,” I said, leaning forward on the edge of my chair. “You care so passionately about justice and fairness that your own mission calls you to do this for everyone.” Elliot sat back in his chair. He expected a simple interview and was now being asked to deploy some serious resources! And perhaps more importantly, I challenged him to figure out how to deliver some of the solutions that are normally reserved for folks with ultrahigh net worth. It was quite a challenge. To democratize the best investment advice coupled with the best available solutions. “Oh, and one more thing, Elliot: I think you should make a complimentary review service that is entirely free! People need to know how they are being treated!” Elliot took a few deep breaths. “Geez, Tony! I know you think big, but to gear up and make this available to everyone, at no charge? Come on!” I just smiled and said, “Yes, crazy, isn’t it! No one else is going to do this. Nobody is showing how people are overpaying for underperformance. My guess is that we could show them using technology! You have the resources and the will to make this happen if you commit yourself!” I let the conversation end by simply asking him to take some time to think about the impact of what this could mean for people’s lives and to get back in touch once he had fully thought it through.

IT’S DOABLE

Elliot returned to Chicago and gathered his troops. After much deliberation, and with a deep determination to find a way, Elliot called me back. After his team reviewed some patented technology we could utilize, he was convinced this could be a game changer. But he had one request. He would want to partner with an extraordinary chief investment officer. One with decades of
experience and the values to match. A captain of the ship not afraid of uncharted waters. I knew just the man . . .

Ajay Gupta is the founder and chief investment officer of Stronghold Wealth Management, a firm that provides “white-glove” service for those of ultrahigh net worth. He is also my registered investment advisor and has been managing my family’s money for over seven years. He spent almost two decades within the world’s largest brokerage firms as the classic corner-office success story. Ajay came to the proverbial fork in the road. His choice? Either leave the brokerage world behind and carry the fiduciary flag or continue to walk the line of trying to be a dietitian within the walls of a butcher shop. I asked Ajay what was the pivotal moment of decision. “It came as a result of total frustration,” he confessed. “There were investments that I knew were best for my client, but the firm wouldn’t allow me to access them because they weren’t ‘approved.’ I didn’t want to steer my client to an inferior investment just so I could earn more. I treat my clients as my family, and I realized that no longer could I make choices by the constraints imposed by someone in a far-off ivory tower.” Ajay’s commitment was not just in words. He gave up a seven-figure bonus to leave and start his own firm. Not surprisingly, his entire team and client base followed him. After years of extraordinary performance and service, Ajay’s departure from the brokerage world earned him the notice of Charles Schwab (a major service provider to independent investment advisors). He received a surprise call from the Charles Schwab headquarters letting him know that Chuck had selected him to represent the face of the more than 10,000 independent RIAs in Schwab’s national media campaign. Subsequently, Ajay arranged for Chuck and me to meet, as he agreed to be one of the 50 financial moguls interviewed for this book.